1. Profile photo of Chau says

    Hello sir,

    For example 3, I’ve done this extract from Income Statement:

    Irrecoverable debt: $12000
    Less: Irecoverable debt
    recovery ($2200)
    Less: Decrease in
    allowance for receivable ($3312)
    Total $6488

    Is it correct?

    Thank you

    • Profile photo of John Moffat says

      The figure is correct (it is the same figure that I get in the lecture and in the answer at the back of the Lecture Notes).

      However, in the Statement of profit or loss will just appear the one figure: Irrecoverable and doubtful debts expense 6488.

      We do not show the workings in the Statement of profit or loss (Income Statement).

  2. avatar says

    Nice to meet you, sir.
    I’m a new member in this web, just have a question I want to ask you, hope you reply me soon ^^ That is, when I watched your video and compared with the knowledge I get from university, it’s a little different, by the way you treated amount of Paul- $2200 of his prevously irrecoverable debt, you’ve already wrote off his AR account, so how can you treated it as
    DR: AR of Paul
    CR: Doubtful Exp
    Why dont you treat it as:
    DR: Cash
    CR: Other income
    And $2200 will be removed from total amount received $238000
    And in additional, when using Accounting system, when you DR – AR of Paul, the system will understand that amount as prepaid AR from Paul, and what happen if you wont sell to Paul anymore, how we treat pending amount $2200?

    • Profile photo of John Moffat says

      It seems that what you were taught at university was wrong.

      The 2,200 received from Paul is not “Other income”. It is a reduction in the irrecoverable expense for this year. (If we had known he was going to pay, then we would not have treated the whole amount as an irrecoverable debts expense in previous years, but it is too late to change last year).

      The amount received is not prepaid receivables – it does not matter whether or not we sell more to Paul. It is an irrecoverable debt recovered. When we removed the debt it was an expense. When we receive the ‘unexpected’ money it is effectively a negative expense (it reduces the total irrecoverable and doubtful debts expense).

    • 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.)

  3. 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.

  4. 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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