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Sir, could you please help me understand the test question 3 from irrecoverable debts and allowances?
The balance given includes a debt of 2,500 which is irrecoverable – so the 2,500 needs removing.
It includes two debts which are to be allowed for. That is no problem – we leave the amounts as owing (but would create an allowance).
It includes cash received from Ken. What should have happened is Dr Cash Cr Irrecoverable debts (because the debt doesn’t exist). If it includes cash then what has happened is they have Dr Cash Cr receivables. That is wrong and to to get the correct balance we need to add 1800.
(It is like one of the examples in the free lecture).It includes cash received from John who had been allowed for. That is fine – because the debt was only doubtful it had been left in receivables and it is correct to Cr receivables when the cash is received.
But if we create an allowance then wont that be deducted from receivables?
And in the third option, how do we assume that the entry was Dr cash Cr receivables and not Dr cash Cr Irrecoverable debt?The allowance is subtracted on the Statement of Financial Position to get the new receivables, but does not affect the receivables account itself.
With regard to the third option, we know that the entry was to credit receivables because the question says it is included in receivables.
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