Accounts Receivable &

Provisions

Business Accounting
Credit facilities
Credit Facilities
Benefits
• The business may be able to enter new markets.
• There is a possibility of increased sales.
• Customer loyalty may be encouraged.

Costs
• Can be costly in terms of lost interest since the business is accepting payment later.
• Cash flow of the business may deteriorate.
• There is a potential risk of irrecoverable debts.

Irrecoverable debts

• If sales are made on credit, there may be problems collecting the amounts owing from
customers.
• Some customers may refuse to pay their debt or be declared bankrupt and unable to pay
the amounts owing.
• Some customers may be in financial difficulties or may dispute the amount owed and
there may be some doubt as to whether their debt will be paid.

Business Accounting
Provision/Allowance for irrecoverable debts
Specific Provision
There will be some specific debts where the customer is known to be in financial difficulties,
is disputing their invoice, or is refusing to pay for some other reason (bad service for
example), and therefore the amount owing may not be recoverable. The allowance for such a
debt is known as a specific allowance.

General Provision
The past experience and history of a business will indicate that not all of its trade receivables
will be recoverable in full. It may not be possible to identify the amount that will not be paid
but an estimate may be made that a certain percentage of customers are likely not to pay. An
additional allowance will be made for these items, often known as a general allowance.

Business Accounting
Irrecoverable Debts Recovered
Recovered Bad Debt
There is a possible situation where a debt is written off as irrecoverable in one accounting
period, perhaps because the customer has been declared bankrupt, and the money, or part
of the money, due is then unexpectedly received in a subsequent accounting period.

Accounting for Recovered Bad Debt

When an irrecoverable debt is recovered, the credit entry (above) cannot be taken to
receivables as the debt has already been taken out of the receivables balance.

Accounting entry is either: or:

Dr Cash Dr Cash
Cr Irrecoverable debts expense Cr Irrecoverable debts recovered

Business Accounting
Sales Tax

Business Accounting
Principles of sales tax
 Sales tax is a form of indirect taxation.
 A business that is registered for sales tax is essentially a collection agent for the
government.
 Sales tax is charged on purchases (input tax) and sales (output tax).
 Sales tax is excluded from the reported sales and purchases of the business.
 Periodically the business pays the sales tax to the tax authorities.
 If output tax exceeds input tax, the business pays the excess to the tax
authorities.
 If input tax exceeds output tax, the business is repaid the excess by the tax
authorities.
 Sales tax is sometimes called value added tax (VAT) or goods and services tax.
 Sales tax is charged on most goods and services (depending on tax regime)

Business Accounting
Accounting for sales tax
Sales tax paid on purchases (input tax)

Sales tax charged on sales (output tax)

Business Accounting
Accounting for sales tax (cont.)
Payment of sales tax

Receipt/Refund of sales tax

Business Accounting
Disclosure of sales tax
Profit & Loss Account

Source: Engro Foods Annual Report 2016

Special Disclosures

Source: Engro Foods Annual Report 2016

Business Accounting
Disclosure of sales tax (cont.)
Balance Sheet (in case of Tax Recoverable)

Source: Engro Foods Annual Report 2016

Balance Sheet (in case of Tax payable)

Source: Pioneer Cement Annual Report 2015

Business Accounting