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at the beginning of the year the allowance for receivables was 850$. at the year-end, the allowance required was 1000$. during the year 500 $ of debts were written off, which includes 100$ previously included in the allowance for receivables. what is the charge to IS for receivable expense for the year?
1st step: increase in allowance 150$ (1000-850). Dr – irrec.debt expense-150$, Cr- allowance-150$
2nd step: 500$ of debts were written off, which includes 100$ previously included in the allowance for receivables. solution: if 100 $ previously included in allowance, it means it was charged as an expense before. then we shoul record 400$ as a debit to irrec.debt expense account and credit to the receivables..
totally irrecoverable debt expense is 150$+400$=550$… But book states that answer is 650$. the book takes that 100$ into account twice although it was recorded and charged as expense before/.. why?650$ i Suggest
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(there was a loss of 150$=(1000-850) and bad debts written off of 500$ =making it 650$ to Income statement)
______________________________________________________________________but i also dont understand why accounting 100 twice….(in 850 and 500)
Asking you for the expense/charge in the Statement of profit or loss is the most likely type of question on this in the exam.
You need to look for three things:
Irrecoverable debts written off – this is an expense
Money received from debts previously written off – this is a negative expense
The change in the allowance – if it is increasing then the difference is an expense; if it is decreasing then the change is a negative expense.It is those three things (the second one less likely in the exam) and the figure you are after is the total of the three.
So…..in this question:
Irrecoverable debts written off: expense of 500
Change in allowance: (1000 – 850): an increase, so an expense of 150.So total expense is $650.
This approach will always work.
We have not charged the irrecoverable twice. To prove it to you, what you could do is write off the debt and since 100 was allowed for in the allowance at the end of last year you could simply remove 100 from the allowance.
So…..cost of writing it off this year so far is the remaining 400. However, that would mean that there was only 750 allowance left (850 – 100). But we want to increase the allowance to 1000. So to increase it costs us 1000 – 750 = $250. Add on the cost of the 400 not already allowed for and you get $650 as the total cost.
Although you can get the answer either way, the way I wrote first it the easiest always, and it always gives the correct answer 🙂Hope that all makes sense.
why do we figure out the change in allowance.
also I don’t know where I can watch your lectures, id be grateful for a link to access it
It is all explained in my lectures.
Click on ‘ACCA’ in the top bar. On the new bar that appears click on ‘FA’.
That will take you to a page listing all of our free resources for Paper FA, including the lectures and the notes that go with the lectures.
The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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