Allowance For Impairment Of Trade Receivables

Question 1

Define allowance for impairment of trade receivables.

Answer 1

• Refers to an estimate of the amount of debts that may be uncollectible in the future.
• Presented as a deduction against trade receivables in the Balance Sheet

Question 2

Give 2 reasons why a business writes off its customers as bad debts.

Answer 2

1) The customer is bankrupt

2) The customer is dead

Question 3

Explain, with relevant accounting principles, the purpose of accounting for allowance for impairment of trade receivables.

Answer 3

The prudence concept states that the business must adjust the value of any asset if its value is likely to be reduced. This is to ensure that the asset is not overstated. Hence a business makes an estimate of debts that are likely to be uncollectible and present it as a deduction against the trade receivables.

The matching concept states that the income earned during an accounting period has to be matched against the expenses incurred in the same accounting period. Hence impairment loss on trade receivables has to be recorded in the same accounting period when the business records the credit sales.