Irrecoverable Debts and Allowances Example 3 – ACCA Financial Accounting (FA) lectures
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hello professor if George was a doubtful debt at the end of year 2 and we removed him from our debtors balance , Why did we again credit our receivables account with 8000 in year 3 when it was discovered that his now a bad debt when he had no longer been included in our debtors account
We do not remove doubtful debts from the balance on the receivables account – we create an allowance for receivables. We only remove debts from the receivables account when it is decided that they are irrecoverable.I do explain this in the lectures.
Hello John, If it’s a credit balance on the bad debts expense account, is the negative expense still included under expenses in the SOPL?
Thank you.
Hello professor,
After watching the lecture and reading your replies regarding Ann and George, I am still slightly confused.
Youve said in the lecture and in your replies to the students here, that we could Debit the allowance and Credit the expense/receivables? if want to, however, it will only make accounts slightly messier and the effect on the balances will not change.
I opted for the “messier” way and was able to get my balances same as yours. But I still want to know your opinion on the entries that I have passed concerning Ann and George.
For Ann:
Dr Cash
Cr Receivables (already part of cash receipts in the question)
and
Dr Allowance
Cr Expense
For George:
Dr Expense
Cr Receivables
and
Dr Allowance
Cr Expense
I was able to get the correct the balances using this way too, but are these entries correct?
Thank you.
Yes – they are correct 馃檪
Sir, on 11:20
So we credit expense account for 2200 to correct the mistake (and increase AR balance by 2200), but are we not supposed to debit Sales account for the same amount?
got it, please ignore this question
Are you referring to Ann’s debt (which is what I am taking about at 11:20) which is $2,000, or about Paul’s debt which was $2,200.
If you are referring to Paul’s debt then there is no mistake to correct. He has paid the $2,200 and so we debit cash and credit irrecoverable debts expense (because it is effectively a negative expense). We have not made any more sales (we recorded the sales when we first sold the goods to him).
Thanks
Hi John
I am Having little confused with example three of chapter eight, we subtracted the last year’s allowance balance of 12560 from 9248 of this year and got 3312 as a decrease which I took as irrecoverable but you credited irrecoverable and debited allowances which made irrecoverable to decrease so I would like to know what is 3312 irrecoverable or allowance and why you credited irr. and debited allowances.
thank you
When the allowance increases, the increase is an expense and is debited to the expense account. However when the allowance decreases (as is the case here) then it is a negative expense – we debit the allowance so as to reduce it and credit the expense account to reduce the net cost this year.
Thank you
You are welcome.
Hello John, If it’s a credit balance on the bad debts expense account, is the negative balance still included under expenses on the SOPL? Thanks.
Hi John,
Slightly confused with George case.
拢8k was debited in irrecoverable debt exp account last year and again we are debiting 拢8k as irrecoverable debt .Aren’t we showing it as expense twice in 2 years??
Thanks.
No, because last year in what included in the ‘allowance for receivables’ account because he was doubtful. This year he is not included and so the cost of increasing the allowance is 8,000 lower than it otherwise would be.
Hello Sir, can I ask where is Ann’s paid for $ 2,000?
The question says that the amount received from Ann is included in the total cash receipts of $238,000. The entry for the total receipt is Dr Cash and Cr Receivables.
There is no other entry for Ann. She will not be included in the calculation of the allowance for receivables at the end of the year because she is no longer doubtful.
Hello,
Can you please tell what we would do if Ann had only paid $1000 instead of the full $2000?
The $1000 received would be entered as normal (in the same way as we entered the $2000).
The remaining $1000 would almost certainly be written off as being irrecoverable (although the question would state this).
Thank you ,
What would we do if the 1000 is still considered as doubtful debt?
Then we would include it in the total allowance required at the end of the period.
This was quite a heavy lecture.
I just dont understand the logic behind George, that if we had to do it the normal method how it would proceed.
I remove 8,000 from Receivable because it is bad debt now, and remove 8,000 from Allowance. Now what is the next debit credit entry in order to add the 8,000 to the Irrecoverable and Doubtful expense account ? If I am not mistaken I think I heard you quickly say you would want to add 8,000 back to Allowance for the CR…didn鈥檛 get into my sense. Please elaborate the next DR CR.
If you chose to do that then the allowance would be 8,000 lower and so the increase needed to get the closing allowance required would be 8,000 higher.
Why would we need to increase allowance again ? I dont get you. We just closed it by reducing the 8000.
Our job was to the reduce allowance and now just focus on how to increase Irrecoverable and Doubtful expense account with a dual effect with some other account.
In this case the reduction will be lower than it would be had the opening allowance not been reduced.
Hi John.
We have expense out the george receivable in previous year as well as in next year with the same amount. May be i am getting anything wrong.
No. Although we transferred George to the irrecoverable debts expense account, we are saving 8,000 allowance because it is no longer needed this year. The two effects cancel out.
a bit lost,
but will try to catch up during the MCQ test .
Thanks
Hello may I ask a question from the bpp text book. There is a question said during the year 500 dollars have been written off including 100 dollars previously included in the allowance for receivables. So when calculating the total expense charged in SOPL, what I did is I subtract this 100 from 500 because I thought using 500 will cause double counting. But the answer just use 500 directly which I am not sure why. Could you explain that a bit? Much appreciated!
In future you must ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
The total expense in the SOPL is the cost of the irrecoverable debt plus the change the allowance. By all means do what you suggest but if you do the allowance will be reduced by 100 and therefore the change in the allowance will be 100 more – so the total expense will still be the same. I do actually explain this in my lectures and why it is therefore easier just to charge the whole 500 to the expense account.
(If you are watching the free lectures then you do not really need the Study Text – the lectures are a complete free course and cover everything needed to be able to pass the exam well. The essential book is the Revision Kit because practice at exam standard question is vital for passing the exam.)
Thank you so much for the reply and sorry for asking the wrong place. I will go back revise the lecture!
Best regards.
Hi John,
Just a quick one, correct me if I’m wrong but the Revision kit you refer to, it’s the exam kit with just a bunch of “pass paper” question resources, isn’t it?
Thank you!
Kaplan call their book ‘Exam Kit’ and BPP call their book ‘Revision Kit’ (and they are the two ACCA Approved Publishers). The contain lots of past exam and other exam standard questions (and answers) for practice. Getting a kit and working through every question is essential to passing the exam.
Hi John,
Just as I had suspected 馃檪
Thank you very much for providing a response and clarifying, and I agree, it is essential to get the exam/revision in order to secure the best results possible.
Thanks John!
You are welcome 馃檪
Hi John,Thanks for th lecture it mas made things quite simple now.
But just a quick question you showed the break down of the irrecoverable & doubtful debt shown in the statement of Profile and loss.I just had to clarify that we only present the final value of the working in the statement of Profit and loss and not the entire working,right?
Hi John,
Your lectures have been a great help, thank you so much for them!
I’ve come across a problem though, if in a QN they report net receivables for the prev year and tell us that the allowance for them have in increased by a certain amount to let’s say X in the next. I’m now asked to report the receivables for this year, am I supposed to add the allowance of last year to the opening bal of the receivables account and why?
Also, net receivables is the amount we get after deducting allowance for receivables?
Sorry, I’m supposed to report the net receivables
Net receivables are the receivables at the end of the year less the allowance needed at the end of the year.
Thank you JOHN, this lecture is a little difficult and here is my question. As you said in QUESTION(b), when I debit Allowance 8000 credit Receivables, the Allowance is 1496 {(87200-6000+8000)*4%-2000}, the balance is 3064{12560-8000-1496}.
In the Irrecoverable Debts Expense sheet,
the debit part is Receivables 4,000,
the credit part is Receivables 2,200; Allowance 1496,
thus I could not get the SOPL 6488. My question is a little confusing but I hope to get your answer. Thank you again.
Several things:
Firstly the best way of dealing with George is as I do in the lecture, which is to credit Receivables and Debit Irrecoverable debts expense (not the allowance for receivables).
Secondly, The specific allowance required is 6,000 for Mick, and therefore the general allowance needed at the end of the year is 4% x (87200 – 6000) = 3,248. (The 87200 is already after removing George’s 8,000).
So the total allowance required is 6000 + 3248 = 9248, and since the allowance brought forward was 12560, we need to reduce the allowance by the difference, so debit the allowance with 3312 and credit irrecoverable debts with 3312.
I suggest that you watch the lecture again. It might be helpful for you to have the printed answer in the lecture notes in front of you.
Thanks for your answer first. I have printed the notes and learn a lot from them.
In addition, I still don’t understand the answer if I choose to debit allowance because your answer is the same as you said in the lecture. I search online and some comments say the part of knowledge is related to F6 TAXATION, is it true? Is it reasonable for me to try to understand the “not the best” way to solve the problem?
At last, thanks for your reply. Best wishes and have a good day.
Paper TX (it is no longer called F6) is concerned with how the tax is calculated and has nothing at all to do with the financial accounting entries.
If you choose to debit the allowance account with George’s $8,000 instead of the expense account, then there will be 8,000 less in the expense account. However the balance brought forward on the allowance account will also be reduced then by 8,000 so the ‘missing figure’ so as to end up with the balance required at the end of the year will need to be 8,000 higher. This missing figure is transferred to the expense account and so the final result will be exactly the same.
Thanks for your kindness, John. I have learnt a lot from your lecture and your comments.
Have a good day! Thank you!
Thank you very much… I’m really convinced to start writing the ACCA exams……
You are welcome 馃檪
Dear John,
Thank you for an amazing breakdown of irrecoverable debts and allowances. This has enhanced my grasp of the entire topic.
The only challenge I have is with Example 3(c) – the treatment of Ann’s $2,000, being the doubtful debt repayed. In your solution, Cash account was debited, receivables account was credited, but nothing was done to the allowance for receivables account. I was expecting her $2,000 to be removed from the allowance for receivables account, being that it was included in the $12,560 balance brought forward from year ended 2000.
You also mentioned in the video that you will worry about the allowance account later, but you didn’t get round to it. Please I am really eager to know how we should deal with situations like this.
Please what should be the accounting entry for Ann in these 3 accounts; Cash, Receivables, Allowance for Receivables.
Thank you
There is no need to make any separate entry in the allowance account. The reason is that when we calculate the allowance at the end of the year, we obviously do not include her in the total because she is no longer doubtful. So the change in the allowance (which is what goes to the expense account) automatically takes account of the fact that her allowance is no longer needed.
(What you could do if you prefer, is remove her allowance separately – Dr Allowance Cr the expense account. If you do that then when you create the new allowance, then the change needed will be different by the same amount and the net result will be exactly the same. The way I do it is more common in real life, but more importantly is easier and quicker in the exam.)
Hi John. I don’t understand what you have mentioned in the brackets. Could you please give me more info on this please?
andreis: Mick’s doubtful debt has been recognised – it is included in the total allowance for receivables at the end of the year and therefore in the expense of increasing the allowance.
You say that you would rather adjust the accounts throughout the year, but in practice it is usually only at the end of the accounting period that the accounts will be examined and the adjustments put through. More importantly, although by all means adjust for each item individually, as far as questions in the exam are concerned it is much more efficient and faster to do it as I do in the lectures (and remember that in the exam you will not be required to write up t-accounts even though you are expected to understand them).
With regard to Ann, we do not show the cash received as being income separately – we reduce the net expense by the amount as I have done in the lecture.
Dear John, I’m in the same boat as Munhs, above, what happened to Micks 6,000 Debit Expense account – Credit Allowance, but also what happened to Ann, she should have also been 2,000 Credit Expense account, Debit Allowance? – I’d rather adjust my accounts through out the year for when the transactions happen, and reduce the allowance balance accordingly. Regarding Ann, you’ve expensed the PnL in FY 2000, which is why I think that we should also show the credit in the PnL in FY 2001? Otherwise you’ve just offset your sales with the expense not recognising in the end any income for Ann.
Hi Sir,
Why Mick Rs 6000 doubtful debit is not recorded as debit in the expense account?
why Mick doubtful debt Rs 6000, is not being recorded as debit in the expense account?