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    • 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

  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.

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