Week 12

Fundamentals of
Financial Accounting
(FFA)

BBA 2k21
Receivables

Receivables/ Trade
Receivables/ Accounts
Receivables/ Debtors

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Irrecoverable debts & Allowances
1. Irrecoverable debts (Bad Debt)
• Accounting for Irrecoverable debts
• Irrecoverable Debts Subsequently recovered

2. Allowance for Receivables / Provision

for receivables/ Provision for doubtful
debts

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Irrecoverable debts
• An irrecoverable debt is a debt which is, or is considered to be,
uncollectable.
 
• With such debts it is prudent to remove them from the accounts
and to charge the amount as an expense for irrecoverable debts to
the statement of profit or loss.
• The original sale remains in the accounts as this did actually take
place.

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Accounting for Irrecoverable debts
Example 1

Irrecoverable Debt Expense (Dr.) $ 790

Trade Receivables (Cr.) $790
Irrecoverable Debt Expense (Dr.) $ 1,240
Trade Receivables (Cr.) $ 1,240
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Accounting for Irrecoverable debts – Subsequently recovered
When Goods are sold on credit
Trade Receivables (Dr.)
Sales / Revenue (Cr.)

When Cash received from Customer

Cash (Dr.)
Trade Receivables (Cr.)

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Accounting for Irrecoverable debts – Subsequently recovered
When Debt becomes Irrecoverable (If not paid by customer)
Irrecoverable Debt Expense (Dr.)
Trade Receivables (Cr.)

When Cash Received after recording as Irrecoverable

Cash (Dr.)
Irrecoverable Debt Expense (Cr.)

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Accounting for Irrecoverable debts – Subsequently recovered
Example 2

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Accounting for Irrecoverable debts – Subsequently recovered
Example 2
At 31 December 20X7 (Lenny Smith)
Irrecoverable Debt Expense (Dr.) $ 699
Trade Receivables (Cr.) $ 699

During the year to 31 Dec 20X8

Trade Receivables (Dr.) $ 17,832
Sales (Cr.) $ 17,832
Cash (Dr.) $ 16,936
Trade Receivable (Cr.) $ 16,936
Received from Lenny Smith
Cash (Dr.) $ 699
Irrecoverable Debt Expense (Cr.) $ 699
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Allowances for Receivables
Allowances For Receivables
• If there is concern over whether a customer will pay but there is
still hope that the amount (or at least some of it) can be recovered
an 'allowance' is created.

• This course of action would be necessary if a customer was having

cash flow difficulties but still felt they would be able to pay if given
a little time.
Irrecoverable Debt Expense / Bad Debts (Dr.) (Profit & loss)
Allowance for receivables (Cr.) (Provision / estimation)

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Example 3

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Example 3
31 December 20X1
Irrecoverable Debt Expense (Dr.) $ 300
Allowance for receivables (Cr.) $ 300
During 20X2
Trade Receivable (Dr.) $ 100,000
Sales (Cr.) $ 100,000
Cash (Dr.) $ 94,000
Trade Receivables (Cr.) 94,000

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Example 3
Movement in Allowance
(Previously, Jake Estimated that will not receive $ 300, Not he
estimates that will not receive $ 700 so, 700-300= $ 400)

Irrecoverable Debt Expense (Dr.) $ 400

Allowance for receivables (Cr.) $ 400

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Example 3
During 20X3
Trade Receivable (Dr.) $ 95,000
Sales (Cr.) $ 95,000
Cash (Dr.) $ 96,000
Trade Receivables (Cr.) 96,000

(Previously, Jake Estimated that will not receive $ 700, Not he

estimates that will not receive $ 600 so, 600-700= $ -100)
Allowance for receivables (Dr.) $ 100
Irrecoverable Debt Expense (Cr.) $ 100

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Summary - Receivables

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Control Accounts & Reconciliation

• Control Accounts
• Reconciliation

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Control Accounts
• Control accounts are general ledger accounts that summarise a
large number of transactions. As such they are part of the double
entry system.
• They are used to prove the accuracy of the ledger accounting
system.
• They are mainly used with regard to receivables and payables
balances.

• At the same time most businesses will maintain what is referred to

as a 'memorandum.' This simple 'list of balances' is used as a record
so that companies know how much each customer is due to pay
and how much they are due to pay each supplier.
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Control Accounts
• When a company transfers the daily total of the sales book into the
general ledger the double entry is:
Dr Receivables ledger control account
Cr Sales revenue.

• When they transfer the total of the purchase day book (Cr.
Purchases) the double entry is:
Dr Purchases
Cr Payables ledger control account

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Contra Entries
• The situation may arise where a customer is also a supplier. Instead
of both owing each other money, it may be agreed that the
balances are contra’d, i.e. cancelled.

• The double entry for this type of contra is:

Dr Payables ledger control account (Trade Payables)
Cr Receivables ledger control account (Trade Receivables)

• The individual receivable and payable memorandum accounts must

also be updated to reflect this.

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Example - 4

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Control Accounts - Reconciliation

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Example 5
Rayneydaze is a business selling umbrellas branded with corporate logos. The umbrellas are sold on credit,
rather than for cash. The accountant is carrying out a reconciliation of the receivables ledger control account
balance, which is $172,000 to the total of the balances on the individual accounts in the receivables ledger,
which is $176,134.

The following has been found: 

• A contra item of $1,500 has not been entered in the receivables ledger control account.
• A cheque for $555 from a customer has been dishonoured. The correct double entry has been posted but
the individual accounts have not been updated.
• A payment of $322 from a customer has incorrectly been entered in the accounts receivable ledger as $233.
• Cash received of $800 has been debited to the individual customer’s account in the accounts receivable
ledger.
• Total credit sales of $4,500 to a large accountancy firm, Close & Counter have been posted correctly to the
ledger account but not recorded in the control account.

Correct the receivables ledger control account and reconcile this to the sum total of the individual accounts
in the accounts receivable ledger.
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