Chapter 08

Irrecoverable Debts and Allowances

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 Irrecoverable debts and allowances
Topic list
 Irrecoverable debts
 Allowances for receivables
 Accounting for irrecoverable debts and receivables allowances
 Irrecoverable debts and allowances on the ETB

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 Irrecoverable debts and allowances
Irrecoverable Debts
An irrecoverable debt is a debt which is not expected to be paid by
Definition debtor.

Debtor:
When?  Die, bankrupt, foreign governments restrict payment, dishonest…

Impact to PL?
Irrecoverable debt are specific debts owed to a
business which it decides are never going to be
paid
Entry:
Dr Irrecoverable debts
Cr Receivables (Receivables
Accounting treatment control account)
written off as an expense on the income
statement

Impact
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 Irrecoverable debts and allowances
Irrecoverable debts written off
Irrecoverable debts written off are presented for as follows.
 Sales are shown at their final invoice value in the statement of
profit or loss. The subsequent failure to collect the debt is a
separate administrative matter.
 Irrecoverable debts expense is shown as an administrative
expense.
 The receivable is removed from the receivables control account and
ledger.

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 Irrecoverable debts and allowances
Irrecoverable debt written off and subsequently paid

Case 1: Case 2:

bad debt previous written off, If bad debt unexpected repaid

now unexpected paid in same in different accounting period
accounting period (i.e. bad debt written off in
year 2005 and now paid in
2006)

the amount unexpected paid

just simple reversed (i.e. bad is income for that period (year
debt written off amount $1,000 2006)
and now unexpected paid $500
 the bad debt for period now the OTHER new bad debt
only $500) written off is still shown as
Expense in Income
statement.

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 Irrecoverable debts and allowances
Accounting treatment

For irrecoverable debt  use irrecoverable debt account:

Dr Irrecoverable debt a/c (expense in P&L)

Cr Trade account receivable

End of accounting period  use I&E a/c to balance Irrecoverable

account
Dr I&E a/c
Cr Irrecoverable debt a/c

If irrecoverable debt was recovered in same If irrecoverable debt was recovered in

accounting period: different accounting period:
Dr Trade account receivable/Bank Dr Trade account receivable/Bank
Cr Irrecoverable debt a/c (income in
Cr Irrecoverable debt a/c (expense in
P&L)
P&L)

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 Irrecoverable debts and allowances
Allowances for receivables

An allowance for receivables is an estimate of the percentage of

Definition debts which are not expected to be paid.

may be specific (an allowance against a particular receivable)

How?
simply a percentage allowance based on past experience of
irrecoverable debts.

An increase in the allowance for shown as an expense in the

receivables income statement

shown net of any receivables Trade receivables in the balance

allowance sheet

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 Irrecoverable debts and allowances
Accounting principles

Income Statement
initially charged as an (for period which
allowance expense allowance is
created)

increased in allowance
allowance subsequently  charged as expense
(in P&L for the period
already exist increased in which increased
allowance made)

the decreased in
allowance  credited
allowance subsequently back to Income
already exist decreased Statement (for the period
in which decreased
allowance made)

The value of trade accounts receivables in

Balance sheet  shown after deducting Prudence concept
allowance for receivable 201109 – Chapter 8: Irrecoverable debts and allowances 8
 Irrecoverable debts and allowances
Example:

ABC Co makes sales of $300,000 (all on credit) and bad debt write off to
$6,000. Cash received from customers during year $244,000, so that at 30
June 2006, the business has outstanding receivables of $50,000. The
allowance for bad debt is 5%.

Sales 300,000
Cash received from customer 244,000
56,000
Bad debt written off 6,000
Trade receivables outstanding 50,000
 Allowance = 5% * $50,000 =$2,500  Expense in P&L
 in BS  trade receivable shown:
Total receivables at 30 June 06 50,000
Less allowance for receivable (2,500)
47,500

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 Irrecoverable debts and allowances
Double entry for Allowances

Only movement (increase, decrease ) amount  debit/credit to irrecoverable debts in

Income statement

When business provide Dr Irrecoverable debts account (expense)

allowance for first time Cr Allowance for receivable

If a higher allowance is required

Dr Irrecoverable debts expense (only increased amount)
Cr Allowance for receivables (only increased amount)

In subsequently, business
provide allowance 
movement If a lower allowance is required
Dr Allowance for receivable (only decreased amount)
Cr Irrecoverable debt expense (only decreased amount,
income in the I&E)

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 Irrecoverable debts and allowances
Example

Example: irrecoverable debts and allowance for receivables combined

Consider the following example.
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 needs to
adjust the allowance for receivables to be the equivalent of 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.
Required
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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 Irrecoverable debts and allowances
Irrecoverable debts and allowances on the ETB

• Calculate the amount of irrecoverable debts and the level of

the allowance as usual
• Prepare the year end journals as usual
• Enter these journals in the adjustments columns of the ETB,
opening new lines for irrecoverable debts expense and
allowance for receivables if necessary
• Include these adjustments in the ETB cross-cast to prepare the
financial statements
• Enter the journals in the ledger accounts as usual

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 Irrecoverable debts and allowances
Irrecoverable debts and allowances on the ETB
Worked example
• Lorraine runs a bookshop. She has extracted the following initial trial balance as at 31 December
20X9:
DR CR
£ £

Cash at bank 4,391

Opening capital 20,000
Loan 2,000
Non-current assets 30,000
Trade payables 9,642
Irrecoverable debt expense 50
Expenses 3,896
Purchases 42,875
Sales 96,475
Trade receivables 8,622
Allowance for receivables 350
Drawings 38,833
Suspense 200
Profit for the year (to be determined) ?
128,667 128,667
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 Irrecoverable debts and allowances
Irrecoverable debts and allowances on the ETB
She needs to take account of the following matters:
(a) As at the end of the reporting period there is a debt of £695 to be written off.
(b) Of the remaining receivables, Lorraine is concerned that one amount of £250
may prove difficult to recover, so wishes to make an allowance against it.
(c) During the reporting period, £200 was banked in respect of a debt which had
been written off in the reporting period ended 31 December 20X8. The only
entry in respect of this was in the cash at bank account.
Complete Lorraine's ETB to calculate her profit for the reporting period.

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 Irrecoverable debts and allowances
Irrecoverable debts and allowances on the ETB
Solution
Statement of profit or Statement of financial
Ledger balance Trial balance Adjustments loss position
DR CR DR CR DR CR DR CR
£ £ £ £ £ £ £ £

Cash at bank 4,391 4,391

Opening capital 20,000 20,000
Loan 2,000 2,000
Non-current assets 30,000 30,000
Trade payables 9,642 9,642
Irrecoverable debt
expense 50 695 300 445
Expenses 3,896 3,896
Purchases 42,875 42,875
Sales 96,475 96,475
Trade receivables 8,622 695 7,927
Allowance for
receivables 350 100 250
Drawings 38,833 38,833
Suspense 200 200
Profit for the period 49,259 49,259
128,667 128,667 995 995 96,475 96,475 81,151 81,151
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The adjusting journals are as follows:
£ £
(a) DEBIT Irrecoverable debt expense 695
CREDIT Trade receivables 695
(b) DEBIT Allowance for receivables (350 – 250) 100
CREDIT Irrecoverable debt expense 100
(c) DEBIT Suspense a/c 200
CREDIT Irrecoverable debt expense 200

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 Ending of Chapter 8

 Study Manual – Read, read and read all chapter 8

(p.204 – p. 221)
 Question Bank – Complete all questions in Chapter 8

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