Allowance for receivables

You can do the double entries in several ways – all that matters is that you end up with the correct expense in the Statement of profit or loss, and the correct balance on the Allowance for receivables account.

What you suggest is fine (and I agree seems more sensible) but it does end up creating a lot more work.

The easiest way is to always CR Receivables and DR Irrecoverable debts expense for all irrecoverable debts (whether or not they were previously doubtful). The reason that it does not end up being charged twice in the income statement is that if you do it this way, then at the end of the year you calculate what allowance is needed at the end of the year and change the existing allowance – the double entry for the change being to the irrecoverable debts account.

Let me give you a very simple example to explain.

Suppose you have a debt of $1000 and you have created an allowance of $1000 because it is doubtful.
Next year you decide that it is irrecoverable. CR Receivables and DR Irrecoverable debts expense – the receivable is gone, and at the moment there is an expense of 1000.
Then you decide what allowance you need this year. Since the debt no longer exists you need the balance on the allowance account to be zero. But there is a balance of 1000 there at the moment. So…..you change it by DR Allowance and CR Irrecoverable debts expense with 1000.

The allowance is now zero, and the net expense on the Irrecoverable debts expense account is also zero – which is correct.

Obviously for such a ‘baby’ example it would be just as easy to do what you suggest. However when there are many things happening then what I have just said is much easier.

I don’t know if you have watched my lecture, but if you do then you may see what I mean.

(Also, remember that there is very little testing of double entry in the exam because in real life the computer usually does the DR’s and CR’s. Most questions on irrecoverable and doubtful debts will be asking what the expense in the Statement of profit or loss will be. For this you do not need to use t’accounts – it wastes time and is not necessary. The total expense will be the total of any irrecoverable debts plus the change in the allowance (if it is increasing. Minus the change in the allowance if it is reducing).

I hope that helps 🙂

You are welcome 🙂

You can make the entry that way and you will end up with the same final expense (which is all that matter – it doesn’t matter how we do the double entries).

However, it takes longer and can end up being very confusing. Certainly for exam questions, the second way (and the way I do it in the lecture) is by far the safest, easiest and the quickest 🙂

The question says that the four items have been included in the balance of 50,000. This means that the 2900 will have been deducted in arriving at the 50,000 and therefore no adjustment is required for it (since it was correct to deduct it).

Gabriell – it is from the OpenTuition Course Notes!!!!!!