Chapter 9 - Irrecoverable debts and allowances

Question 1

What are irrecoverable debts?

Answer 1

Debt that the business believes will never be paid

Question 1

What are indicators of a customer that may not pay debts

Answer 1

• Bankruptcy of the customer
• The disappearance of the customer
• An outright refusal to pay

Question 2

What are the accounting entries of irrecoverable debts

Answer 2

Dr Irrecoverable debts expense
Cr Receivables

Question 3

What are the accounting entries of irrecoverable debts recovered?

Answer 3

Dr Cash
Cr Irrecoverable debts expense

Question 4

What are doubtful receivables?

Answer 4

Stuff you probably won’t get back

Question 5

How can you account for doubtful receivables?

Answer 5

Create an allowance for receivables.

This is the 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

Debit entry to the irrecoverable debts account

Question 6

What are the allowance for receivables?

Answer 6

Dr Irrecoverable debts expense
Cr Allowance for receivables

Question 7

What are the accounting entries to increase allowance?

Answer 7

Dr Irrecoverable Debt expense
Cr Allowance for receivable

Question 8

What are the accounting entries to decrease allowance

Answer 8

Dr Allowance in receivables
Cr Irrecoverable debt expense

Question 9

What is the approach to questions when calculating the allowances for trade receivables?

Answer 9

1. Brought forward balances for receivables (debit) and the allowance (credit)
2. Write off irrecoverable debts
3. Record recovery of irrecoverable debts
4. Close off receivables account to obtain the closing balance
5. Calculate and post the required movement to the allowance for receivables
6. Close allowances and expense accounts

Question 10

What’s the approach to accounting entries if customer whose debt was written off is collected

Answer 10

[If cash from credit customer who had an allowance pays]
Dr Cash
Cr Receivables

[Write off customers debt we previously had an allowance for debt]
Dr Irrecoverable debts expense
Cr Receivables

[Write debt off as irrecoverable]
Dr Cash
Cr Irrecoverable debts expense