1

IRRECOVERABLE DEBTS AND ALLOWANCES FOR RECEIVABLES

BAD DEBTS/AMOUNT WRITTEN OFF/IRRECOVERABLE DEBTS/RECEIVABLE EXPENSE

Bad debts : Bad debt is one that no longer expected to be paid. For instance customer
may have gone into liquidation ( means customer has become bankrupt). The debt will
be written –off. OR A debts that can not be collected is called bad debt.
Bad debts is an expense

Journal entry:
Bad debts DR
Account receivable CR

ALLOWANCE FOR BAD DEBTS / DOUBTFUL DEBTS / PROVISION FOR BAD DEBTS

Allowance for receivables: If there is some doubt whether a customer can or will pay
his debt an allowance for receivables is created. OR when it expected at balance sheet
date that amount will not be received called allowance for bad debts.
POINTS
1. Allowance for bad debts are always created at end of year.
2. Allowance for bad debts is contra asset. ( this means that allowance for bad debts
are deducted from receivables in balance sheet. Receivables are current asset and
allowance reduces the current asset, therefore called contra asset)
3. B.b/d of allowance for bad debts is on Credit side.
4. B.c/d of allowance for bad debts is on Debit side.
5. Allowance for bad debts is recorded according to prudence concept.
6. Allowances created at end of year are total allowances , it means they also include
allowances of previous years. ( eg allowance 200 on 31.12.05 and allowance 500 on
31.12.06 now 500 is total allowance, it also includes 200 of previous year)
7. Increase in allowance is an expense
8. Decrease in allowance is income.
9. Always total allowances are deducted from receivables .( eg allowances are 200 at
start of year and 500 at end of year , 300 will be shown as expense in income
statement and 500 will be deducted from receivables)

SIR SAJID
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Allowance for receivables

There are two types of allowance that may appear in the organization’s accounts.
Specific allowance
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 allowance
The past experience and history of a business will indicate that not all of its trade
receivables will be recoverable in full, often known as a general allowance.

Accounting for the allowance for receivables

Journal entry for allowance for bad debts
Increase in allowance for bad debts
Dr Bad debts / Irrecoverable debts expense
Cr Allowance for receivables

Decrease in allowance for bad debts

Dr allowance for bad debts
Cr bad debts
Note:
1. Increase in allowance------------------------------- expense ( income statement DR)
2. Decrease in allowance------------------------------- income ( income statement CR)

Allowance for bad debts net current assets

Increase decrease
Decrease increase

BALANCE SHEET
CURRENT ASSETS
Receivables (as per receivable A/C /Control account) xx
Less:
Specific allowance (x)
General allowance (x)
Net receivables xx

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Receivables as per Receivable a/c xxx

Less amount available for specific allowance(explanation-1) (xx)
Amount available for general allowance xxx
% of general allowance xxx

Explanation-1:(Total receivales are 90000 If 10000 is receivable from Mr A and specific

allowance is 10% on 10000 which is receivable for Mr A , amount available for general
allowance will be 80000 but amount shown in allowance for bad debts account will be 1000 )

JOURNAL ENTRIES

PREVIOUS YEAR’S ALLOWANCE WAS WRITTEN OFF IN CURRENT YEAR

Suppose allowance for bas debts 3000 of year 2006
Bad debts 3000
Allowance for bad debts 3000
Above allowance of 3000 was written off in year 2007
Allowance for bad debts 3000
Receivables 3000

RECOVERY OF BAD DEBTS( WRITTEN OFF IN PREVIOUS YEAR)

Suppose amount written off of 2006 was 2000
Bad debts 2000
Account receivable 2000
Above amount of 2000 was recovered in 2007
Cash / A/C receivable 2000
Bad debts recovered 2000

SIR SAJID
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PREVIOUS YEAR’S ALLOWANCE WAS RECOVERED INCURRENT YEAR

Suppose allowance for bad debts of 5000 in year 2006
Bad debts 5000
Allowance for bad debts 5000
Above allowance of 5000 is recovered in 2007
Cash 5000
Account receivable 5000
Allowance for bad debts 5000
Bad debts recovered 5000

QUESTION RELATED TO RECOVERY OF PREVIOUS ALLOWANCE IN CURRENT YEAR.

Receivables as per receivable account on 31.12.05 were 100000. Allowance for receivables
were estimated 10% of receivables on 31.12.05. In year ended 31.12.06 previous year
allowance was recovered . prepare receivable a/c , bad debts a/c and allowance for bad debts
a/c and SOCI AND SOFP for two years.

RECEIVABLE A/C
b.c/d 31.12.05 100000
01.01.06 b.b/d 100000
Cash 10000

b.c/d 31.12.06 90000

ALLOWANCE FOR BAD DEBTS A/C

31.12.05 b.c/d 10000 Bad debts a/c 10000

01.01.06 b.b/d 10000

Bad debts 100000

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BAD DEBTS A/C

Allowance for bad debts 10000 31.12.05 P & L a/c 10000

31.12.06 P&L a/c 10000 Allowance for bad debts 10000

ENTRIES
Credit sales
Account receivable DR
Sales CR
Cash refund
Account receivable DR
Cash CR
Dishonoured cheque
Account receivable DR
Bank CR
Interest on overdue amount
Account receivable DR
Interest income CR
Sales return
Sales return DR
Account receivable CR
Discount allowed
Discount allowed DR
Account receivable CR
Cash received from customers
Cash DR
Account receivable CR
Contra of debtors
Account payable DR
Account receivable CR
Bad debts
Bad debts Dr

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Account receivable Cr

DISHONOURED CHEQUE:
01.01.06 sold goods on credit to Mr A amount 10000
Account receivable 10000
Sales 10000
03.01.06 received cheque of 10000 from Mr A and deposited into bank
Bank 10000
Account receivable 10000
05.01.06 cheque was returned from bank and dishonoured
Account receivable 10000
Bank 10000

Account receivable
Opening balance xxx
Credit sales xxx Sales return xxx
Cash refundable xxx Discount allowed xxx
Dishonored cheque xxx Cash received from customers xxx
Interest on overdue amount xxx Contra with creditors / set off xxx
Bad debts xxx
Closing xxx

Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision xxx
In current year) Specific Provision xxx

B.c/d
Specific Provision xxx
General Provision xxx Bad debts xxx

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Bad debts account

A/C receivable(written off during year) xxx
Cash (bad debts recovered) xxx
A/C receivable(written off at end) xxx
SOCI / P& L A/C xxx
Allowance for bad debts xxx

IF BAD DEBTS ACCOUNT IS NOT MAINTAINED , THEN ALLOWANCE FOR BAD DEBTS ACCOUNT
WILL BE AS FOLLOWS:
Allowance for bad debts account
Receivables xxx B.b/d
(previous year allowance written off General provision xxx
In current year) Specific Provision xxx

Written off during year xxx

Written off at end xxx

B.c/d
Specific Provision xxx
General Provision xxx SOCI / P & L A/C xxx

SIR SAJID
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ASSIGNMENT
Accounts are closed on 31 december each year for all following questions

1. Bad debts during year 5000. Bad debts at end of year 10000. Receivables on 31.12.05
100000. Calculate amount shown as an expense for 31.12.05 and calculate amount of
receivables shown in balance ssheet for 31.12.05.
2. Bad debts during year 4000. Bad debts at end of year 20000. Receivables on 31.12.05
80000. Calculate amount shown as an expense for 31.12.05 and calculate amount of
receivables shown in balance ssheet for 31.12.05.
3. Bad debts during year 6000, at end of year 10000. Bad debts of previous year are now
recovered 3000 by cash. Receivables on 31.12.05 100000. Calculate amount shown as
an expense for 31.12.05 and calculate amount of receivables shown in balance ssheet
for 31.12.05.
4. Bad debts during year 1000. Bad debts at end of year 5000. Receivables on 31.12.05
70000. Calculate amount shown as an expense for 31.12.05 and calculate amount of
receivables shown in balance ssheet for 31.12.05.
5. Receivables on 30.06.06 were 100000 and on 30.06.07 were 120000. Allowance for
doubtful debts is always maintained 10% of receivables.
(a)calculate amount shown in SOCI both year
(b) calculate net receivables shown in SOFP for both years
(c) journal entry for allowance for doubtful debts for both year

For following questions, Prepare bad debts account , allowance for bad debts account
and accounts receivable.
6. Receivables on 31.12.05 were 100000, amount written off during year 6000, amount
written off at end of year 10000, allowance is 10% of receivables . Receivables on
31.12.06 were 150000, bad debts during year 5000 bad debts at end of year 12000 ,
allowance is 10% of receivables .
(a) calculate amount shown in SOCI for both years
(b) calculate net receivables shown in balance sheet for both years
7. Receivables on 31.12.05 were 150000, amount written off during year 7000, amount
written off at end of year 10000, allowance is 10% of receivables . Receivables on
31.12.06 were 200000, bad debts during year 5000 bad debts at end of year 12000 ,
allowance is 10% of receivables .
(a) calculate amount shown in SOCI for both years
(b) calculate net receivables shown in balance sheet for both years

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8. Bad debts during year 4000, bad debts at 30.06.06 10000, receivables at 30.06.06
100000. Current year allowance for bad debts is 4000 which is 20% lower than previous.
(a) Calculate amount shown in SOCI as an expense for 30.06.06 and calculate net
receivables shown in SOFP FOR 30.06.06
9. Bad debts during year 4000, bad debts at 30.06.06 10000, receivables at 30.06.06
100000. Current year allowance for bad debts is 6000 which is 20% more than previous.
Calculate amount shown in SOCI as an expense for 30.06.06 and calculate net
receivables shown in SOFP FOR 30.06.06

10. At 31 December 20X2 a company’s receivables totaled 400,000 and a allowance for
receivables of 50,000 had been brought forward from the year ended 31 December
20X1.
It was decided to write off debts totaling 38,000 and to adjust the allowance for
receivables to 10% of the receivables.
What amount should appear in the company’s statement comprehensive income for
the year ended 31 December 20X2?
11. At 1 July 20X2 the receivables allowance of Q was 18,000.
During the year ended 30 June 20X3 debts totally 14,600 were written off. It was
decided that the receivables allowance should be 16,000 as at 30 June 20X3.
What amount should appear in Q’s statement of comprehensive income for
irrecoverable debts and receivables allowance for the year ended 30 June 20X3?
12. At 30 September 20X2 a company’s allowance for receivables amounted to 38,000,
which was five per cent of the receivables at that date.
At 30 September 20X3 receivables totaled 868,500. It was decided to write off 28,500 of
debts as irrecoverable and to keep the allowance for receivables at five per cent of
receivables.
What should be the charge in the statement of comprehensive income for the year
ended 30 September 20X3 ?
13. At 1 July 20X3 an allowance for receivables of 83,000.
During the year ended 30 June 20X4 debts totaling 46,000 were written off. At 30 June
20X4 it was decided that a receivables allowance of 218,000 was required.
What figure should appear in the company’s statement of comprehensive income for
the year ended 30 June 20X4 ?
14. In the balance sheet at 31 December 20X5, Boris reported net receivables of 12,000.
During 20X6 he made sales on credit of 125,000 and received cash from credit
customers amounting to 115,500. At 31 December 20X6, Boris wished to write off debts
of 7,100 and increase the allowance for receivables by 950 to 2100. What is the net
receivables figure at 31 December 20X6?

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15. In year ended30.09.08 sales was7000000.receivables are 5% of sales. Company wishes

to maintain allowance for receivables 4% which is 20% higher than previous. During the
year irrecoverable debts amounting to 3,200 were written off and debts amounting to
450 and previously written off were recovered.
What is expense for the year?
16. At start of the year with total receivables of 87,000 and an allowance for receivables of
2,500.
During the year, two specific debts were written off, one for 800 and the other for 550.
A debt of 350 that had been written off as irrecoverable in the previous year was paid
during the year. At the year end, total receivables were 90,000 and the allowance for
receivables was 2,300.
What is the charge to the income statement for the year ?
17. Receivables at start 6000, receivables at end 8000, cash sales 30000, cash received from
credit customers 500000, sales return 9000, bad debts 10000
(a) Calculate credit sales
(b) Calculate total sales shown in SOCI.
18. Allowance for receivables at start 6000, bad debts during year 5000 and bad debts at
end 10000 . allowance at end of year was 10% of receivables . Receivables at end
100000.calculate amount shown in SOCI for year.
19. Allowance for receivables at start 4000, bad debts during year 3000 and bad debts at
end 8000 . amount 600 which was written off in previous year was recovered now .
allowance at end of year was 5% of receivables . Receivables at end 100000.calculate
amount shown in SOCI for year.

SIR SAJID
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COMPLICATED QUESTIONS

QUESTION-1Receivables are as follows

31.12.06 31.12.07

Receivables 100000 150000

Following adjustments need to be made at 31.12.07

(a) Receivable from Noor merchant of 10000 which had been specifically provided for in full
in year 2006.
(b) Specific provision on 31.12.07 at 75% is to be made against balance of Mr A amounting
to 20000.
(c) A general provision is always made at 10% of remaining receivables.
Calculate amount shown in SOCI FOR 31.12.07 by Preparing following ledger accounts
for year ended 31.12.07
(a) Provision for doubtful debts
(b) Bad debts

SOLUTION

Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision 9000
In current year) Specific Provision 10000

B.c/d
Specific Provision(20000x.75) 15000
General Provision 13000 Bad debts 9000

Bad debts account

A/C receivable(written off during year) xxx
Cash (bad debts recovered) xxx
A/C receivable(written off at end) xxx
SOCI / P& L A/C 9000
Allowance for bad debts 9000

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31.12.06 31.12.07
Receivables as per control account 100000 150000
Less amount available for specific allowance -10000 -20000
Amount available for general allowance 90000 130000
10% of general allowance 9000 13000

QUESTION-2Receivables are as follows

31.12.06 31.12.07

Receivables 200000 300000

Following adjustments need to be made at 31.12.07

(a) Receivable from Noor merchant of 20000 which had been specifically provided for in
full in year 2006.
(b) Specific provision on 31.12.07 at 50% is to be made against balance of Mr A
amounting to 30000.
(c) A general provision is always made at 10% of remaining receivables.
Calculate amount shown in SOCI FOR 31.12.07 by Preparing following ledger
accounts for year ended 31.12.07

(a) Provision for doubtful debts

(b) Bad debts

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SOLUTION

Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision 18000
In current year) Specific Provision 20000

B.c/d
Specific Provision(30000x.5) 15000
General Provision 27000 Bad debts 4000

Bad debts account

A/C receivable(written off during year) xxx
Cash (bad debts recovered) xxx
A/C receivable(written off at end) xxx
SOCI / P& L A/C 4000
Allowance for bad debts 4000

31.12.06 31.12.07
Receivables as per control account 200000 300000
Less amount available for specific allowance -20000 -30000
Amount available for general allowance 180000 270000
10% of general allowance 18000 27000

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QUESTION-3Receivables on 31.12.07 were 100000. Specific provision and general provision on

01.01.2007 were 5000 and 10000 respectively.
Receivables on 31.12.07 100000 were as follows
Mr A 20000
Mr B 10000 specific provision 10%
Mr C 40000
Mr D 30000 specific provision 100%
General provision on 31.12.07 was 10% .
Calculate amount shown in SOCI for 31.12.07 by Preparing following ledger accounts for
year ended 31.12.07
(a) Provision for doubtful debts
(b) Bad debts

Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision 10000
In current year) Specific Provision 5000

B.c/d
Specific Provision:MrB 10000 x10% 1000
Mr D 30000 x100% 30000
General Provision 6000 Bad debts 22000

Bad debts account

A/C receivable(written off during year) xxx
Cash (bad debts recovered) xxx
A/C receivable(written off at end) xxx
SOCI / P& L A/C 22000
Allowance for bad debts 22000

Receivables on 31.12.07 100000

Less amount available for specific allowance
Mr B -10000
Mr D -30000
Amount available for general allowance 60000
General allowance 10% 6000

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QUESTION-4Following information pertains for year ended 30.06.07.

Receivables as at 01.07.06 600000

Transactions for year ended 30.06.07 are as follows:
Sales(including cash sales which is 20% of credit sales) 720000
Cash received from customers 400000
Sales return 10000
Amount written off at 30.06.07 20000
General provision is always maintained 2% of receivables.
Prepare account receivable, allowance for bad debts account and bad debts account for
year ended 30.06.07.

SOLUTION-4

Account receivable
Opening balance 600000
Credit sales(720000/120x100) 600000 Sales return 10000
Cash refundable Discount allowed
Dishonored cheque Cash received from customers 400000
Interest on overdue amount Contra with creditors / set off
Bad debts 20000
Closing 770000

30.06.06 30.06.07
Receivables as per control account 600000 770000
Less amount available for specific allowance ------ -------
Amount available for general allowance 600000 770000
2% of general allowance 12000 15400

Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision 12000
In current year) Specific Provision

B.c/d
Specific Provision
General Provision 15400 Bad debts 3400

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Bad debts account

A/C receivable(written off during year) xxx
Cash (bad debts recovered) xxx
A/C receivable(written off at end) 20000
SOCI / P& L A/C 23400
Allowance for bad debts 3400

QUESTION-5Following balances have been extracted from books of Ali enterprises

Account receivable on 31.12.12 450000
Allowance for doubtful debts at 31.12.12 13500
Transactions for year 2013 are given below
Credit sales 690000
Collection from customers 340000
During year 2013 bad debts were 20000 and allowance for doubtful debts was increased
to 23400.
(a) Prepare account receivable , bad debts account and allowance for bad debts
account.
(b) If examiner asks to prepare only receivable a/c and allowance for bad debts a/c
SOLUTION-5

Account receivable
Opening balance 450000
Credit sales 690000 Sales return
Cash refundable Discount allowed
Dishonored cheque Cash received from customers 340000
Interest on overdue amount Contra with creditors / set off
Bad debts 20000
Closing 780000

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Allowance for bad debts account

Receivables xxx B.b/d
(previous year allowance written off General provision 13500
In current year) Specific Provision

B.c/d
Specific Provision
General Provision 23400 Bad debts 9900

Bad debts account

A/C receivable(written off during year) 20000
Cash (bad debts recovered) xxx
A/C receivable(written off at end)
SOCI / P& L A/C 29900
Allowance for bad debts 9900

SOLUTION-5 REQUIREMENT (B)

Account receivable
Opening balance 450000
Credit sales(600000X.8) 690000 Sales return
Cash refundable Discount allowed
Dishonored cheque Cash received from customers 340000
Interest on overdue amount Contra with creditors / set off
Bad debts 20000
Closing 780000

SIR SAJID
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Allowance for bad debts account

B.b/d
General provision 13500
Bad debts during year 20000 Specific Provision

B.c/d
Specific Provision
General Provision 23400 SOCI 29900

QUESTION-6 Following information is available for year ended 31.12.2010

Outstanding debts amount Required allowance %

Upto 2 months 10000 1%
More than 2 months & upto 4 months 20000 2%
More than 4 months % upto 6 months 30000 5%
Requirement: prepare aging schedule for doubtful debts as given above

SOLUTION

Period debt outstanding amount estimated allowance % allowance

Upto 2 months 10000 1% 100

More than 2 months & upto 4 months 20000 2% 400

More than 4 months % upto 6 months 30000 5% 1500

Total 60000 2000

1. BILL OF EXCHANGE: A non-interest bearing written order used in trade that binds
one party to pay fixed some of money to another party at a predetermined future
date.
2. DRAWYER : is a party who issues the bill
3. DRAYEE: is a party to whom the bill of exchange is addressed.
4. ACCEPTOR: is a party to whom bill of exchange is addressed.
5. ENDORSER: A person or firm who, by signing negotiable instrument(bill of exchange)
transfers title of instrument to another .

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6. PAYEE: the person to whom payment is made is called payee

7. ACCOMODATION BILL
8. PROMISORY NOTE: is a legal instrument in which one party promises in written to
pay specified amount on specified date.
9. AGED RECEIVABLES ANAYSIS: shows how long invoices for each customer have been
outstanding.

EXAMPLE: Mr A sold goods to Mr B on credit . Mr A issued a bill of exchange on 05.10.05 and

Mr B accepted bill on 10.01.05. In bill of exchange date of payment is 30.11.05, (If Mr B does
not accept it, bill of exchange does not have any value )

Mr A----------------- Drawer

MrB----------------- Drwaee

MrA------------------- Payee ( the person to whom payment is made is called payee. Here Mr A is a
payee)

Mr B----------------- Acceptor

Maturity date---------30.11.05

Mr A has two options . one is he will retain bill of exchange till maturity date and receive
amount on maturity date from Mr B. Other option is that Mr A will go to bank and he will give
bill of exchange to bank and receive money from bank against bill of exchange.

EXAMPLE: Mr A sold goods to Mr B on credit . Mr A issued a bill of exchange on 05.10.05 and

Mr B accepted bill on 10.01.05. After two days Mr A transfer title to Mr C , now Mr C will
receive amount from Mr B.

Mr A--------------- Endorser

Mr C--------------Endorsee / Payee

Bill of exchange / Trade bill Accommodation Bill

1.Drawn and accepted for trade purpose. 1.drawn and accepted for providing funds to

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A friend in need.

2.Drawn again proper consideration 2.Drawn without consideration

3. This is proof of debt 3.This is not proof of debt

Bill of exchange: This is issued by Mr A only when goods are sold on credit by Mr A to Mr B

Accommodation bill: Goods are not sold Mr A to Mr B even though Mr A issue a bill (called
accommodation bill) and B will accept it . Now Mr A will show this bill to bank and will receive
amount from bank.

POINTS RELATED TO ACCOMODATION BILL

1. This is only for fulfillment of money requirements

2. This is issued to friends or close relatives who trust on you.
3. This is just for financial help
4. Goods are not sold even though this is issued

Bill of exchange promissory note

Is written by seller of goods is written by purchaser of goods

There are three parties drawer, drawee only two parties (drawer & drawee)

And payee(sometimes drawer & payee are (drawer & drawee are always same)

Same)

SIR SAJID