Comments

    • Profile photo of John Moffat says

      Dr Irrecoverable debts expense; Cr Receivables (just as I do in the lecture!!)

      (You can debit the allowance instead and the final result will be exactly the same (because the expense of changing the allowance will be greater) but it all gets a lot more messy :-) )

      • avatar says

        Dear sir
        If we debit the allowance by 8000 then we should debit the expense account by 4688 and credit allowance account by the same amount (4688)
        The balancing figure of expense acc will be 6488 and and there is no change and same as u did.
        Am i right up to this stage?
        If yes
        Then the balancing figure of allowance account will not be 9248
        In the credit side of allowance there will be 6000, 3248, and 4688 and in its debit side there will be just 8000
        And the balance figure of allowance will differ as it will be 5936
        Will that be an issue?
        Please clear my concept dear sir
        Thanks in advance dear sir

      • Profile photo of John Moffat says

        I really don’t know why you want to debit the allowance – it makes life much more messy.

        However if you do, the allowance will then only be 4,560.

        The allowance at the end of the year still has to be 9,248. So the allowance will now need increasing by the difference of 9,248 – 4,560 = 4,688. So Cr allowance and Dr the expense account with 4,688.

        The expense account will now have a debit of 4,000 (the other irrecoverable), a debit of 4,688 (as above) and a credit of 2,200. The net expense will therefore be 6,488 exactly as before.

        (You will not be doing debits and credits on this in the exam – to do t-accounts will simply waste time – which is why it is so much easier to do it the way in the lecture. The total expense is: all the irrecoverables; plus the increase in the allowance (or less the decrease in the allowance); less any irrecoverable debt recovered. That always works and is so much faster than messing with t-accounts.)

  1. avatar says

    Dear John,

    Thanks very much for your lecture. It is great. I have a question of Example 3 and hope you could help me out. Thanks.

    For “George had still not paid the $8,000 owing, and must now be regarded as irrecoverable”, you debit expense with $8,000. But it has been debited as an expense last year when allowance was made. Is debiting it again a duplication of the expense?

    I think it would be more resonable if debiting allowance instead of expense in this case, since the money has been collected already.

    Please kindly tell me what is wrong with my logic. Thanks again:)

    • Profile photo of John Moffat says

      You can debit the allowance if you want, but it just makes life more complicated.

      If you do debit the allowance, then fine – the expense will be lower by $8000.

      However, when you calculate the new allowance, since the old allowance will be $8,000 lower, it means that the expense of increasing it to the new figure will be $8,000 more.

      So the end result will be exactly the same :-)

      • avatar says

        Thanks, I get what you said, but another question comes out.

        Last year the $8000 has been treated as an expense, and this year again. Is it reasonable to expense the same in two different years?

      • Profile photo of John Moffat says

        No – it is not treated as an expense this year.

        OK, if you write off the debt to the irrecoverable debts account, then initially there is an extra 8,000 expense this year. However, as I wrote before, it means the increase in the allowance (which is an expense) is 8,000 less than it otherwise would have been. So the net effect is that there is no expense for it this year.

      • avatar says

        Sorry I don’t get your response for the second question. Here is a simple senario I made up (which hopefully would clarify everything):

        At the end of year 1, A plc has a balance of 10 dollars, all from B plc, under the AR allowance A/C. Let’s assume the balance is 0 in the begining of Year 1.

        At the end of year 2, A plc has a balance of 50 dollars under the AR allowance A/C, and the 10 dollars from B has been deemed bad,;

        My entries are:

        Yr1: Dr Expense 10
        Cr Allowance 10
        (The 10 dollar due from B is expensed here)

        Yr2: Dr Expense 40
        Cr Allowance 40
        Give the 10 dollar due from B has turned bad, the entry is:
        Dr Expense 10
        Cr Allowance 10
        (Here it is expensed again)

        So why do you say it is expensed only in last year. Thanks in advance.

      • Profile photo of John Moffat says

        I have already told you that you can do it either way, and the end result will be the same. You obviously do not believe me!!

        Doing it your way, in the second year you start with an allowance of 10, you write of the debt: Dr allowance Cr Receivables 10. So the allowance is now zero. You then create an allowance at the end of the year: Dr Expense Cr Allowance with 50. So the expense in the second year is 50.

        Doing it the more sensible way: In the second year you start with an allowance of 10. You write of the debt: Dr Expense Cr Receivables 10. The allowance is still 10. At the end of the year you increase the allowance to the 50 required: Dr Expense 40 Cr Allowance 40.
        The total expense is 10 + 40 = 50. Exactly the same.

        For this tiny example I suppose both ways are as quick. However in general the second way is much more efficient (especially since F3 is not a debit/credit exam – there is very little asked about debit and credits and you certainly won’t have time to prepare t-accounts when you are doing the multiple choice questions).

      • avatar says

        Actually what I am asking is NOT the balance of allowance at the end of second year. You explained it perfectly in your first reply.

        What I am struggling with is that you said “So the expense in the second year is 50″. In my opinion, the expense for the second year should be 40 rather than 50. Because 10 has been debited as expense in the first year. Then why on earth expense it again in the second year?

        Many thanks.

      • Profile photo of John Moffat says

        Please read what I wrote again! I was NOT explaining the allowance at the end of the second year. Read again properly the last line of each of the second two paragraphs.

        The total expense in the second year is 50 – whichever way you choose to do it.

        However, this is a rather futile discussion. If you are not prepared to believe me and if you prefer to waste time in the exam preparing t-accounts, then no problem.

  2. avatar says

    Dear John,

    Thank you a lot for your lecture. I am not sure if you may explain me one thing….but anyway I will ask… The matter of fact is that I tried to test myself and I do not really understand the Question 3 since I don’t agree that we shoul add to receivables what Ken payed.

    Thank you a lot in advance

    • Profile photo of John Moffat says

      The cash received from Ken has been entered on the receivables account (they will have Dr cash Cr Receivables).
      However it should not have been entered on receivables because Ken had already been written off (it should have been credited to irrecoverable debts expense account).
      So we need to correct receivables by cancelling the wrong entry. So we Dr receivables, which increases receivables.

    • Profile photo of John Moffat says

      The amount that Ann paid has been credited to the receivables account (the question says that it is included in the total cash receipts) and that was correct.

      The amount that Paul paid was also included in the total cash receipts (according to the question) but it should not have been credited to receivables (because he had been written off as irrecoverable) and so the entry needs removing.

  3. avatar says

    Please help!

    ‘An increase in an allowance for receivables of $8’000 has been treated as a reduction in the allowance on the financial statements. Which of the following explains the resulting effects?’

    The correct answer is:

    Net profit overstated by $16’000, receivables overstated by $16’000.

    I understand why they are both overstated but how is the value of $16’000 obtained? I chose the wrong answer: Net profit overstated by $16’000, receivables overstated by $8’000.

    Thank you!

    • Profile photo of John Moffat says

      If there is an increase in the allowance then it means there should be an expense of 8,000.
      If they had recorded nothing, then the profit would be overstated by 8,000.

      However, then had recorded it as a decrease in the allowance and to they had treated it as a negative expense. So that means an extra 8,000 overstated. In total, 16,000.
      (same for receivables)

  4. avatar says

    Hi John

    I have a question on Test 3-Chapter 8. I understand that the $2.5K from Mike should be deducted from receivables. Very unlikely we will get any of this money. However, for Ken the $1.8K had already been previously written off and not included in receivables. Would this not be a credit to expense? DR CASH CR EXPENSE…

    Thanks

    • Profile photo of John Moffat says

      You are quite correct.
      However, the question says that the balance at the moment includes that figure, which means that (wrongly) the bookkeeper must have Dr Cash Cr Receivables.
      This is wrong, and so to correct it we need to Dr Receivables Cr Expenses (which is what should have been done in the first place).
      (It is actually a very likely mistake in real life because the bookkeeper might not have know that the debt had been written off and therefore did what we normally do when we receive money from a customer.)

      I know the wording of the question is not so nice, but it was a real exam question.

  5. avatar says

    Dear Sir i a bit confuse about test question 2
    At 31 December 2005 the ledger of X Co. included a $5,376 allowance for receivables. During the year ended
    31 December 2006 irrecoverable debts of $2,040 were written off. Receivables balances at 31 December 2006
    totalled $173,760 and the company wished to carry forward a general allowance of 2%.
    The total charge for irrecoverable debts and change in allowance for receivables in the 2006 income statement is

    my working is 173760 for total Receivable – 2040 bad debts = 171,720
    2% general Allowance on 171,720 = 3,434.40
    Change in Allowance is 5376 for 2005 – 3434.40 for 2006 = 1941.60
    Thus Bad debts 2040 – change in allowance is 1941.60 = 98.40 answer A
    but is the answer for this question it is shown B 139.20.

    Could you please clarify it for me as it is a bit confusing.
    thanks a lot

    • Profile photo of John Moffat says

      The bit that makes the difference is “During the year ended
      31 December 2006 irrecoverable debts of $2,040 were written off”.
      Because they were written of ‘during the year’ it means that the balance on receivables at the end of the year is already after removing them (so we don’t need to remove them again when calculating the general allowance).

      In test question 1, the wording is different – it gives the receivables figure and says ‘it was then decided to write off…’, so in that question they did need removing from the receivables figure.

      Hope that makes it clear.

  6. avatar says

    Could you explain this question?
    Q) Headiington is owed § 37000 by its customer at the start and §39000 at the end, of its year ended 31 Dec 2008.
    During the period, cash sales of §263000 & credit sales of §357000 were made,discount allowed amounted §15750 & discount received §21400.Irrecoverable debt of §10500 were written off & Headington wishes to retain its allowance at 5% of total receivables.

    .The cash received from in the year totalled:
    a) §329750
    b) §593175
    c) §593250
    d) §614650

  7. avatarMemuna says

    Hi Sir,
    I wanted to ask about test Q1 chapter 8
    why are we subtracting the prev amount of $93600 instead of just leaving the full amount of debts as $146400?

    • Profile photo of John Moffat says

      The full amount of debts is certainly not 146500! The receivables are 1240800 less the irrecoverable debts of 88,800.

      The question is asking for the expense in the Statement of profit or loss, and the expense is the cost of removing irrecoverables, together with the change in the allowance.

      Have you watched the lecture, because the notes are to be used with the lectures (not on their own) and in the lecture I do explain this point.

    • Profile photo of John Moffat says

      The question is a little confusing.
      When we receive cash from an irrecoverable then we should Dr Cash and Cr Irrecoverable debts expense.

      When the question says that it has been included in Receivables, it means that we have Dr Cash but Cr Receivables, which is wrong.

      So to correct it we need to Dr Receivables and Cr Irrecoverable debts expense.

  8. avatar says

    Dear Sir,

    I have a question about Question 3 at the end of the Chapter 8.

    Could you please explain why we don’t take into account (4) cash received from John of $2,900 which had previously been allowed for, when calculating revised receivables figure?

    And could you please confirm whether my understanding is correct concerning why we don’t take into the account (2) debts of $500 + $1,500 which are to be specially allowed for – it is because receivables figure should include specific allowance.

    Thank you!

    • Profile photo of John Moffat says

      When the questions says that the balance includes the four items, it means that the 2,900 has been entered on the account, which is correct.

      We don’t adjust for the debts in (2) because they are only doubtful – so we leave the amount in receivables, but create the allowance for receivables for them.

      • Profile photo of John Moffat says

        The correct answer is at the end of the Course Notes (as are all of the answers).
        To show t-accounts really would be wasting time – there is very little testing of t-accounts in the exam.

  9. avatar says

    Hello John,
    Could you please help me understand the difference between Q1 and Q2 ?
    Q1 – AR is decrease by debt write offs:
    ((1,240,800-88,800)*5%)
    whereas in
    Q2 – AR is not decreased by irrecoverable debt write offs:
    (173,760*2%) and not ((173,760-2040)*2%)
    Just trying to find a logic…

    • Profile photo of John Moffat says

      I assume you are referring to the test questions at the end of the chapter.

      The difference between them is in the wording of the question.

      In question 1, the question says “it was THEN decided to write of debts….: which means that they had not already done so.

      However, in question 2, the question says “During the year…….irrecoverable debts were written off). This means that they have already been removed as irrecoverable.

      I hope that explains the difference, but if you are still unclear then please do post again.

  10. avatar says

    Hi John,

    I’m a little confused over questions 2 and 3 on the end of chapter test.
    Here is how I did question 2:
    2040+((173760-2040)x2%)-5376
    =2040+3434.4+5376
    =98.4 = A (is this the correct method and answer?)

    And question 3:
    1. 50000 – 2500 (irrecoverable debt) = 47500
    2. 47500 – 1800 (previous irrecoverable debt that has now been paid, so it is like negative expense or added income) = 45700 (final answer)

    I don’t know what I’m doing wrong here.

  11. avatar says

    Great lecture Mr. Moffat!

    But now I am bit confused with the difference between Allowance and Impairment (in this case impairment for receivables).

    Thanks in advance!

  12. Profile photo of michellesp says

    Prof Moffat,

    My question relates to chapter 8, question 1 of the multiple choice questions in the course notes. Can you please explain to me why it is necessary to add back the 88,800. I worked it out and thought I was correct with answer C but when I checked the answer booklet you have to add back the 88,800 to arrive at answer B.

    • Profile photo of John Moffat says

      We don’t add back the 88,800.

      The expense in the income statement is the cost of writing of irrecoverable debts, together with the cost of changing the allowance for doubtful debts.

      The irrecoverable debts are 88,800. The allowance is reduced by 36,000 – because it is reduced, it is a negative expense.
      So….the overall expense is 88,800 – 36,000.

    • Profile photo of John Moffat says

      There was no need to do anything.

      The question says that he has paid 1200 and that they don’t expect to receive any more. So it stays written off as irrecoverable.

      (The whole debt was written off in the previous year – this year we just bring in the amount he has paid as ‘unexpected income’, treated as a negative expense.)

  13. avatar says

    sir this question is from bpp text book

    A 1 jan 2004 ,Tartar co had receivables of $380000.A specific allowance of $20000 had been made for a business customer ,Drab.The general allowance for receivables was 2.5%.During the year ,Drab went out of the business owing Tartar co $28000,none of which is expected to be recovered.At 31 dec 2004 ,Tartar had total receivables of $420000.There were no specific allowances but the general allowance for receivables was increased to 3%

    what is the charge in the statement of profit or loss for the year to 31 dec for the allowance for receivables and irrecoverable debts?

    THE ANSWER IS $11600.

    can you please explain this whole question with double entry and what do you do when the receivables for the year has increased ?

    • Profile photo of John Moffat says

      At the beginning of the year there was a specific allowance of 20,000 and a general allowance of 2.5% of (380,000 – 20,000) = 9,000.
      So the total allowance was 29,000.

      At the end of the year, the allowance is to be 3% of 420,000 = 12,600.

      So we need to reduce the allowance by 16,400 (29000 – 12,600).

      So the total charge in the statement of profit or loss will be 28,000 (irrecoverable debts) – 16,400 (the reduction in the allowance) = 11,600

      (If you want double entries, then watch my lecture on irrecoverable debts. However doing t’accounts for this question would simply be wasting time. The exam is not really a debit and credit exam – computers do the double entries in practice – the exam tests your accountancy knowledge and the accountants job is to calculate the figures.)

      • avatar says

        Hi prof johnmoffat,
        i though on the bok pg 208 said, we have to remove the total amount of the specific provision from the general provision, and then calculate the general provision based on the figure, but why here we directly deduct the amt of specific allowance rather the provision (i knew the amt is not given in the question, but is this the reason? i’m a bit confused) thank you if you could help me!

      • avatar says

        oops, sorry, on pg 208 of the BPP text book, there’s a sample question,
        XY Co has a balance of recivables of 250000. it wishes to provide a specific allowance of 60% on a debt of 20000. it also wishes to set up a general allowance of 2% or receivables. what is the charge to the income statement?

        in the answer the general allowance is calculated by 2%*230000 (which is total receivables-specific provision 250000-20000, not 250000-12000)

        Thank you!

      • Profile photo of John Moffat says

        The reason is that since there is a specific allowance of 60% of the debt, it must be that we think that the rest of the debt is no problem. So we only calculate the general allowance on the other debts.

      • avatar says

        what if i change the question like this? which rule i should follow then?since i knew both debt amt and allowance

        ?At 1 jan 2004 ,Tartar co had receivables of $380000.A specific allowance of $20000 had been made for a business customer ,Drab on a debt of 28000.The general allowance for receivables was 2.5%.During the year ,Drab went out of the business,none of its debt is expected to be recovered.?At 31 dec 2004 ,Tartar had total receivables of $420000.There were no specific allowances but the general allowance for receivables was increased to 3%

        what is the charge in the statement of profit or loss for the year to 31 dec for the allowance for receivables and irrecoverable debts?

        Thank you so much for such an early morning lifesaving!!!

      • Profile photo of John Moffat says

        At the start of the year, the allowance was:
        Specific – 20,000
        General – 2.5% x (380,000 – 28,000) = 8,800
        So total allowance was 28,800

        At the end of the year, receivables are 420,000 but we then write off the whole of Drab’s debt of 28,000 which leaves receivables as 392,000. (I am assuming that it was not written off during the year – if it had been then the receivables at the end of the year would be still 420,000. In the exam this will be made clear.)

        So…at the end of the year, the allowance required is simply the general allowance of 3% x 392,000 = 11,760

        The expense in the statement of profit or loss is therefore:

        Irrecoverable debt: 28,000
        Less: decrease in allowance (28,800 – 11,760) 17,040

        So final expense: 10,960

  14. avatar says

    Hello please explain that if i want credit my allowance for receivables for 9248 instead of credit 112560 and then debit 3312. The next step is debit an irrecoverable debt for 9248 as I have already increased the allowance account but then I have a different answer. You just only credit an irrecoverable debt for 3312. Regarding what you have done, if I want to debit 9248 then I have to credit 12560 so i’ll have the same answer with you but i don’t understand why?

    • Profile photo of John Moffat says

      There is more than one way of dealing with irrecoverable debts and allowances (all ending up with the same final result) but the way I show in the lecture is by far the best and the easiest.

      The point is that we need to end up with an allowance of 9248, but there is already an allowance of 11560 still sitting on the allowance account since last year.
      So…..to change it to the balance that we need, we simply debit or credit the allowance account to get what we want. In this example we need to debit with 3312 so that we then end up with a credit balance of 9248 as required.

      You can certainly debit the allowance account with 11560 to remove the existing balance (and credit the irrecoverable debts account) and then credit the allowance account with 9248 to create the required balance (and debit the irrecoverable debts expense account). This would end up with the same answer, but it is quicker and easier just to adjust for the difference.

  15. avatar says

    Please can you help explain how the net balance of 706,000 was derived as part of the answers to test question 4?

    i know tho get the receivables, the bad debt of 72,000 is deducted from the trade receivables of 838,000 ie 838000-72000=766,000. and the allowance for receivables is 60, 000. please correct me if im wrong.

    thanks

  16. avatar says

    Hi John. What exactly does this mean/imply (from Q1) “…adjust the allowance for receivables to the equivalent of 5 per cent of the trade receivables based on past events”…

    I don’t quite follow the logic behind this statement. Any clarification would be must appreciated.

    Cheers

    • Profile photo of John Moffat says

      It means that on average in the past, 5% of receivables ended up not paying. So they have decided to create an allowance of 5% this year to be safe – probably 5% of the receivables will not pay again (but they don’t know which people it will be).

      The % they decide on is just a matter of judgement – a combination of the type of business (some businesses have more people not paying than others) and also the economic climate (in times when the economy is bad, more people are likely not to pay). In the exam you will always be told the percentage.

      I assume that you have watched the lecture (because I do try and explain this during the lecture)?

      • avatar says

        Thank you for the explanation. I do understand the maths behind the answer, and i would have known how to solve the problem (were it worded differently). I just couldn’t quite understand what the statement implied, but now i do. Thank you.

        And yes i do watch the lectures religiously…though sometimes it’s the case that watching and comprehending are two different things…still trying to wrap my head around the whole Dr and Cr business…been told it becomes second nature the more you practice (fingers crossed).

  17. avatar says

    CAN ANYONE ANSWER THIS EXAMPLE PLEAZZZZ;;;

    The Income Statement Approach To Estimating Uncollectible Accounts Expense Is Used By Burgess Wholesales. On March 31 The Firm Had Accounts Receivable In The Amount Of 630,000$. The Allowance For Doubtful Accounts Had A Credit Balance Of 3,950$. The Controller Estimated That Uncollectible Account Expense Would Amount To One Half Of 1% Of The Net Sales Made During March. This Estimate Was Entered In The Accounts Byan Adjusting Entry On March 31.
    On April 12,An Account Receivable From Conrad Stern Of 3,110$ Was Determined To Be Worthless And Was Written Off. However, On April24 Stern Won Several Thousand Dollars On a T.V Game Show And Immediately Paid The 3,110$ Past Due Accounts
    PREPARE JOURNAL ENTRIES TO RECORD THE ABOVE.

  18. avatar says

    Could u explain Question3 for me?
    In the lecture Paul’s 2200 payment is debt as IRRECOVERABLE EXPENSE, while in Q3, Ken’s 1800, which is also been written off before, is simply “Add irrecoverable debt recovered 1800″ by the answers. why Ken’s 1800 don’t need to be debt as IRRECOVERABLE EXPENSE ?

    Best Regards

    • Profile photo of John Moffat says

      In example 2 in the lecture, Paul was an irrecoverable debt – we credited receivables and debited irrecoverable debts expense.

      In example 3 in the lecture, and in test question 3, both Paul and Ken are irrecoverable debts recovered – they had been written off earlier but this year we received the cash.

      The correct entry would be to debit cash and credit irrecoverable debts expense (treating as a negative expense). However in both cases the bookkeeper has debited cash and (wrongly) credited receivables.
      So in both cases we need to debit receivables (because it should not have been credited there) and credit irrecoverable debts.

    • Profile photo of John Moffat says

      The explanation is actually in the comment below.

      There is an irrecoverable debt of 2040.
      Also, the allowance for receivables is reduced by 1900.80, and this reduction is effectively a negative expense.

      So the net expense is 2040 – 1900.80

  19. avatar says

    Hi there, I’m a little confused in question 2; why has the £1,900.80 been deducted from the £2,040 and not added? I thought both the irrecoverable and change in allowance was added together for the income statement as expenses? Thanks

  20. Profile photo of Futurediva says

    Chapter 8, Test, Question 3:
    Why should the $1800 irrecoverable debt recovered amount affect the receivables’ account balance (according to the answer)? Isn’t it supposed to be treated as a negative expense instead? Please explain.
    Thanks :)

    • Profile photo of John Moffat says

      It is because the first line of the question says that the balance on receivables includes the following….

      So this means that the 1800 received has been entered in the receivables account, but it should not have been so it has to be adjusted for.
      It will be treated as a negative expense, and should have been credited to the expense account but instead it has been credited to receivables – so it needs correcting.

      • Profile photo of Futurediva says

        Oh oh oh! Silly of me to have missed that bit when it’s included in the tutorial. I should read the question better.
        Thank you so much, Sir! :)

  21. Profile photo of patriote2130 says

    Kindly suggest me the solution for the following question which I found in BPP F3 Finanacial Accounting book. Actally I solved this question and my answer is 10,750 dollar but as per answer provided in the book is 11000 dollar. kindly explain to me in this regard.

    Irrecoverable debts are $5,000. Trade receivables at the year end are $120,000. If an allowance for
    receivables of 5% is required, what is the entry for irrecoverable debts and allowance for receivables in
    the income statement?
    A $5,000
    B $11,000
    c $6,000
    D $10,750

    • Profile photo of John Moffat says

      It depends on the exact wording of the question as to when the irrecoverable debts were written off.

      If they were written off during the year, then the 120,000 is the balance at the end of the year which means the allowance will be 5% of 120,000 (and then the expense is this plus the 5,000 irrecoverable).

    • avatar says

      they are 2 different general journal.

      Allowance for receivable as explained on example 1 and 2 are for specific allowance (doubtful debts) and general allowance ( provision).
      Doubtful debts is for debt which is recoverable but eg. cause it it is overdue for too long therefore the company decided to classify it as doubtful debt.
      So when you do double entry there must be 2 accounts. e.g. if there is doubtful debt it will be dr doubtful/bad debt a/c and cr allowance for receivable. You cannot cr trade receivable because as mentioned earlier it is recoverable.

      You get it nimmyj?
      Correct me if I am wrong.

  22. Profile photo of Sangria9 says

    1. During 2006 you need to debit Bad debt expense a/c for $2,040 (write-off irrecoverable debt).

    2. On Allowance for receivables a/c you have opening credit balance $5,376.
    The company decided to make it $3,475,20 ($173,760 * 2%), so you have closing balance on Allowance for receivables a/c equals to $3,475,20. For this you need to debit this a/c and credit Bad debt expense a/c for $1900,80 (you charging movement on allowance during the year).

    3. The difference on Bad debt expense a/c will go to I&E a/c: $139,20.

    • avatar says

      @katerina. i think your answer is wrong. we always have to reduce bad debts by receivable to get exact closing receivable. after that we will get general allowance from closing receivable. In allowance for receivable account we will reduce this amount from the previous year allowance receivable. Then we will get allowance receivable decrease or increase. if allwance recivable is decrease, we gonna reduce this about with bad debts written off in income statement. if allowance receivable is increase. we gonna add it. simple . Therefore answer is 98.40

      • avatar says

        I completely agree with you, I don’t know why the total receivables ($173760) was multiplied by 2% first before subtracting the allowance for receivables. Shouldn’t it be 2040-(5376-(2% x (173760-2040))) = 98.40. Can someone explain why the irrecoverable debts were subtracted after computing the general allowance and not before?

  23. avatar says

    awesome lecture but ve some querries if any1 can help
    1)George was considered doubtful last year and we credited allowance for doubtful debts and debited irrecoverable debts a/c and finally transferred it to income statement as an expense and again this year it was regarded as irrecoverable and again transferred to income statement as an expense, so isnt this treated as an expense twice???
    2)Ann was also considered doubtful last year and the amount was credited in the allowance for doubtful debts a/c and debited in irrcoverable debts a/c and finally transferred to income statement as an expense now since we are receiving the money why dont we credit the income statement to cancel out the expense we debited in the income statement last year?

    • Profile photo of John Moffat says

      @hwaliji, There is more than one way that you can do the double entries for doubtful and irrecoverable debts, but they all end up with the same final result (i.e. the same charge in the income statement and the same balance on the allowance account).
      The way shown in the lecture is the easiest way.

      With regard to George. Yes – it was part of the expense last year because he was part of the allowance created. However this year, although he has been written off as an expense, he is no longer included in the final balance on the allowance account and so the expense of changing the allowance is lower by the same amount.

      With regard to Ann, here there is no alternative. You must debit cash (cos we have received cash) and you must credit receivables (because she had been left as owing the money in the receivables account). However, she is obviously no longer included in the balance on the allowance account at the end of the year, and so the expense of changing the allowance is lower by the same amount.

    • avatar says

      @martinras, first you need to find receivables balance after writing off irrecoverable debts that is 1240800-88800=1152000 and then calculate 5% of 1152000 which is equal to 57600, therefore this amount will be the closing balance for allowance for doubtful debts a/c and the difference between opening and closing balance is a decrease in allowance for doubtful debts by 36000 which equal to subtracting 57600 from 93600 and then 36000 will be tramsferred to irrecoverable debt expense a/c but remember we have also transferred bad dets 88800 to this a/c on debit side so the net amount to be taken income statement is 88800-36000=52800.
      Hope you understood it.

  24. avatar says

    Thanks first. 100% helpful. Firstly I read lecture then I tried to do exercise my self. I faced difficulty in example 2 & 3. Now I am totally clear after I listen video.

    Thanks again

  25. Profile photo of drrob1983 says

    at the risk of sounding like a complete fool, i have to ask this question. During the video, you explain Paul’s payment of 2200 would be CREDITED to the irrecoverable and doubtful debts expense account. I understand the logic behind this, but as I was doing some practice questions from BPP, a similar question expected me to put recovered amount into an ‘irrecoverable debt recovered’ account and therefore did not specifically affect the charge in the income statement for bad and doubtful debts. From the point of view of the ACCA, which would you think is the correct treatment?

    Kindest Regards,

    Rob

    • Profile photo of John Moffat says

      You can credit an irrecoverable debt recovered account, but this would then appear on the income statement as a negative expense.
      Usually questions just want the net expense in the Income Statement which is why it is easier simply to credit the expense account.

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