Irrecoverable Debts & Allowances for Receivables
Essentials Items to Know
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1. To Deal with a situation where a customer will not be able to pay us what he/she owes us...... This is called an Irrecoverable Debt
Cr Trade Receivables (SOFP) Dr Irrecoverable Debt Expense A/c (SOPL) Being Irrecoverable Debt written off Why??? ... Cr Trade Receivable because we are reducing the amount of money owed to us and Dr Irrecoverable Debt Expense A/c because writing off of a debt is an expense to the sole trader i.e. money we will not receive
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2. Change in Allowance for Receivables Entities will make an allowance for receivables which they think might go bad i.e. customers that a business thinks may not pay. This is a good example of the prudence concept in action
In questions, you will be given the opening allowance for receivables which may go bad, you will have to calculate the closing allowance and finally you will journal the difference so as to ensure you have the required closing allowance Example – Increase in Allowance for Receiveables At 31.12.2012 UCC had receivables of €15,000. €2,000 of these receivables are irrecoverable and should be written off. The allowance for receivables at 31.12.2011 was €1,000. UCC wish to have an allowance for receivables at 31.12.2012 of 10% of receivables. Receivables at 31.12.2012 Less: Irrecoverable Receive bales Net Allowance Required (€13,000 * 10%) Net Receivables at 31.12.12
€15,000 (2,000) €13,000 (€1,300) €11,700
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Journals Cr Trade Receivables
€2,000
Dr Irrecoverable Debt Expense €2,000 Being Irrecoverable Debt Written Off
Allowance for Receivables at 31.12.11
€1,000
Allowance for Receivables Required at 31.12.12
€1,300 €300
Increase in Allowance for Receivables
Cr Allowance for Receivables (SOFP)
€300
Dr Increase in Allowance for Receivables (SOPL)€300 Being Increase in Allowance for Receivables
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STATEMENT OF PROFIT AND LOSS Extract for the Year End 31.12.12 Expenses Irrecoverable Debt
(2,000)
Increase in Allowance for Receivables
(300)
Statement of Financial Position Extract as at 31.12.12
Current Assets Trade Receivables
13,000
Less: Allowance for Receivables
1,300 11,700
Note: An allowance for receivables (aka provision for doubtful debts) is only calculated on receivables which are still in existence. Debts which have been written off are excluded. (No point creating an allowance on debts which have been written off because they are gone anyway ) 5
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Example – Decrease in Allowance for Receivables At 31.12.2012 UCC had receivables of €15,000. €2,000 of these receivables are irrecoverable and should be written off. The allowance for receivables at 31.12.2011 was €1,000. UCC wish to have an allowance for receivable at 31.12.2012 of 5% of receivables.
Receivables at 31.12.2012 Less: Irrecoverable Receivables Net Allowance Required (€13,000 * 5%) Net Receivables at 31.12.12
€15,000 (2,000) €13,000 (€650) €12,350
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Journals Cr Trade Receivables
€2,000
Dr Irrecoverable Debt Expense €2,000 Being Irrecoverable Debt Written Off
€1,000
Allowance for Receivables at 31.12.11 Allowance for Receivables Required at 31.12.12 Decrease in Allowance for Receivables
Dr Allowance for Receivables (SOFP)
€650 €350
€350
Cr Decrease in Allowance for Receivables (SOPL) €350 Being Decrease in Allowance for Receivables
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STATEMENT OF PROFIT AND LOSS Extract for the Year End 31.12.12 Expenses Irrecoverable Debt Decrease in Allowance for Receivables
(2,000) 350
Statement of Financial Position Extract as at 31.12.12
Current Assets Trade Receivables Less: Allowance for Receivables
13,000 (650) 12,350
Note: An allowance for receivables (aka provision for doubtful debts) is only calculated on debts which are still in existence. Debts which have been written off are excluded. (No point creating an allowance on debts which have been written off because they are gone anyway )
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3. To Deal with a situation where A debt that was previously written off (i.e. written off as being irrecoverable) is subsequently received Example On 31.12.10 UCD received a cheque for €850 in relation to an irrecoverable debt which was previously written off Firstly, the write off of the original debt/receivable is reversed
Dr Trade Receivables 850 Cr
Irrecoverable Debts Recovered (SOPL) 850
Being Reversal of Original Write off
Secondly, the Money received is accounted for Dr Bank 850 Cr Trade Receivables 850 Being Money received from Customer So the net effect is nil on Trade Receivables, Bank increases by 850 and the debt previously written off through STATEMENT OF PROFIT AND LOSS is
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reversed (by the Credit to Irrecoverable Debts Recovered SOPL) 4. Other Points
- 2 types of Allowance for Receivables o Specific o General
Proforma for Trade Receivables Trade Receivables at Year End
x
Less: Irrecoverable Debts
(x)
Less: Specific Allowance for Receivables
(x)
Less: General Allowance for Receivables
(x)
Net Trade Receivables at Year End
x
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Note: The General Allowance will be a % of the overall amount outstanding after Irrecoverable Debts and Specific Allowances have been taken account of
Note: Only the Movement in the Allowance for Receivables will be journaled. The movement is made up of:
(Opening General Allowance +Opening Specific Allowance) – (Closing General Allowance + Closing Specific Allowance)
See Manual - Benefits and Costs of Offering Credit Purpose of an Aged Receivables Listing Purpose of Credit Limits
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QUESTIONS TO PRACTICE Question 1 Fatima’s receivables at 31 May 20X7 were $723,800. The balance on the allowance for receivables account at 1 June 20X6 was $15,250. Fatima has decided to change the allowance for receivables to 1.5% of receivables at 31 May 20X7. On 14 May 20X7, Fatima received $540 in final settlement of an amount written off during the year ended 31 May 20X6.
What total amount should be recognised for receivables in the statement of profit or loss for the year ended 31 May 20X7?
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