Chapter 9 Irrecoverable debts and allowances

Question 1

1.1 Irrecoverable debts

Answer 1

An irrecoverable debt is a debt which the business believes will never be paid. This can be due to the bankruptcy of the customer, the disappearance of the customer and an outright refusal to pay. It is prudent to remove irrecoverable debts from the accounts, as they are no longer an asset. The amount of the debt is expensed to the statement of profit or loss, the original sale remains in the accounts as it did actually take place. The double entry is:
- Dr Irrecoverable debts expense
- Cr Receivables
It is possible the irrecoverable debt is then paid, the double entry to record this is:
- Dr Cash
- Cr Irrecoverable debts expense
In the statement of profit or loss the irrecoverable debts expense account includes both debt write offs and the recovery of previously written off debts. The expense is therefore a net figure.

Question 2

2.1 Doubtful receivables

Answer 2

The receivables balance should be reviewed each year to assess any potential future amounts that will not be recovered from customers. This involves reviewing the ageing of receivables balances and considering the probability of payment. Receivables which are considered doubtful are not removed from the receivables balance. It is prudent to recognise the possible expense of not collecting the debt.
An allowance for receivables is therefore set up, this is a credit balance which is netted off against receivables in the statement of financial position to give a net figure for receivables that are probably recoverable. The debit entry is to the irrecoverable debts account.
The allowance for receivables is calculated after all irrecoverable debts have been written off.
The accounting entry for the receivables allowance is:
- Dr Irrecoverable debts expense (statement of profit or loss)
- Cr Allowance for receivables (statement of financial position)
The movement on the allowance from the start to the end of the year needs to be adjusted for. For an increase in allowance the entries are:
- Dr Irrecoverable debt expense
- Cr Allowance for receivable
For a decrease in allowance the entries is:
- Dr Allowance for receivables
- Cr Irrecoverable debt expense

Question 3

3.1 Irrecoverable debts and allowances

Answer 3

Allowances for receivables are calculated at the end of every year. the difference in allowance is charged / credited to the statement of profit or loss. The accounting treatment for irrecoverable debts does not change even if an allowance was originally in place for the debt. Therefore, if we receive cash from our credit customer and we previously had an allowance for the debt, the double entry is:
- Dr Cash
- Cr Receivables
If we write off our customer’s debt and we previously had an allowance for the debt, the double entry is:
- Dr Irrecoverable debts expense
- Cr Receivables
If we write off a debt as irrecoverable and the debt is subsequently recovered, the double entry is:
- Dr Cash
- Cr Irrecoverable debts expense
The impact on the allowance will be considered when we calculate the allowance required at the end of the year.