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At the begging of the year, the allowance for receivables was $850. At the year-end the allowance required was $1,000. During the year $500 of debts were written off, which includes $100 previously included in the allowance for receivables.
Qn: What is the charge to the P&L for receivable expenses of the year?
Sir, The answer is $650 ($150+$500), why the $100 was not taken into consideration ?
You can get the same answer in two ways.
One way is to credit receivables 500, and debit irrec. debts expense 400 and debit allowance 100 (because 100 had already been allowed for).
As a result, the balance on the allowance is then 750 and so to increase it to 1000 needs an extra 250 expense.
So the total expense is 400 + 250 = 650.
The other (easier) was is to credit receivables 500 and debit irrec. debts expense 500.
The allowance then remains at 850 and the cost of increasing it to 1000 is 150.
So the total expense is 500 + 150 = 650.
It doesn’t matter which way you do it, but the second way is the easiest and quickest.
This is explain in my free lectures on irrecoverable and doubtful debts. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
Clear. Thank you Sir.
You are welcome 🙂