Chapter X

Chapter 15
Irrecoverable debts Chapter Title for Irrecoverable debts
and Allowance

An
Introduction to
Financial
Accounting
9th edition

Andrew Thomas & Anne Marie

Ward

© McGraw-Hill Education 2019

 Objectives
By the end of the lecture (and with private study) students
should be able to:

• Explain the nature of irrecoverable debts (bad debts), allowances, and

allowances for irrecoverable debts;
• Distinguish between specific and general allowances for irrecoverable
debts; and
• Show the entries for irrecoverable debts and allowances for
irrecoverable debts in the journal, ledger, statement of profit or loss
and statement of financial position.

© McGraw-Hill Education 2019

 Irrecoverable debts
Irrecoverable debts arise when a trade receivable
(credit customer) is unable (or unwilling) to pay the
amount owed in respect of goods sold on credit.
Irrecoverable debts are sometimes called ‘bad debts’.
Treating a receivable as irrecoverable is a matter of
judgement. A debt may be irrecoverable because:
• the credit customer cannot be traced;
• it is not worth taking the case to Court; or
• the customer has been declared bankrupt (and the
‘final dividend’ in bankruptcy received).

© McGraw-Hill Education 2019

 The ledger entries for irrecoverable
debts
When it is decided that a customer balance is
irrecoverable:
Debit Irrecoverable debts a/c
Credit Trade receivables account

At the end of the accounting period:

Debit Statement of profit or loss a/c
Credit Irrecoverable debts a/c

© McGraw-Hill Education 2019

 The nature of an allowance
A allowance is the setting aside of income to
meet a known or highly probable future liability
or loss, the amount and/or timing of which
cannot be ascertained exactly, and is thus an
estimate.

It is an application of the prudence concept

(providing for losses) and the matching concept
(it recognises the loss against the revenue that
generates it).

© McGraw-Hill Education 2019

Types of allowances for irrecoverable debts

An allowance for irrecoverable debts can consist of

either or both of the following:
• A specific allowance in respect of particular trade
receivable (credit customer) that has been identified
as unlikely to pay their debts;
• A general allowance representing an estimate,
usually computed as a percentage, of the trade
receivables at the end of the accounting year who
are unlikely to pay their debts.

A general allowance for irrecoverable debts involves the

use of an estimation technique.

© McGraw-Hill Education 2019

The ledger entries for an allowance for
irrecoverable debts
To create or increase the allowance:
Debit Movement in irrecoverable debts a/c (P/L)
Credit Allowance for Irrecoverable debts a/c
(SOFP)

Decrease in the allowance:

Debit Allowance for Irrecoverable debts a/c
(SOFP)
Credit Movement in irrecoverable debts a/c (P/L)

The balance on the allowance for irrecoverable debts

account is deducted from trade receivables in the
statement of financial position.

© McGraw-Hill Education 2019

 Worked Example 15.1
(calculating the allowance)
A. Jones has an accounting year ending on 30 November. At 30
November 20X8 his ledger contained the following accounts:
£
Trade receivables 20,000
Provision for irrecoverable debts 1,000
The trade receivables at 30 November 20X9 were £18,900. This
includes an amount of £300 owed by F. Simons that was thought to be
irrecoverable. It also includes amounts of £240 owed by C. Steven,
£150 owed by M. Evans and £210 owed by A. Mitchell, all of which are
regarded as doubtful receivables.

You have been instructed to make a provision for irrecoverable debts

at 30 November 20X9. This should include a specific provision for
debts regarded as irrecoverable and a general provision of 5 per cent
of trade receivables.

© McGraw-Hill Education 2019

 Worked Example 15.1
(calculating the allowance)
Provision for irrecoverable debt at 30
November 20X9 £
Specific provision – C. Steven 240
M. Evans 150
A. Mitchell 210
600
General allowance –
900
5% × (£18,900 − £300 − £600)
1,500

© McGraw-Hill Education 2019

 Example 15.1 Double entry
Irrecoverable receivable:
Dr Irrecoverable debts a/c 300
Cr Trade receivables account 300

Movement in the allowance account:

Dr Movement a/c (P/L) 500
Cr Allow for Irrecoverable
debts a/c (SOFP) 500

This moves the balance on the allowance from £1,000 to

£1,500

© McGraw-Hill Education 2019

 Summary – some key points
• Irrecoverable debts are amounts due from credit
customers which are deemed to be irrecoverable.
• Irrecoverable debts written off reduce trade receivables
and create an expense in the statement of profit or loss.
• Allowances for irrecoverable debts are amounts that
are set aside to cover expected losses, wherein there it
is reasonable to suspect that a trade receivable will not
be received.
• The allowance for irrecoverable debts reduces the
overall balance reported for trade receivables (but does
not write the balances off yet).
• Movements in the allowance for irrecoverable debts
affect the statement of profit or loss – increases,
increase expenses – decreases, reduce expenses in a
period.
© McGraw-Hill Education 2019
 Student - study action
• Read chapter 15.
• Then - try to explain the key terms and concepts
(check your answer with the chapter and the online
glossary).
• Try the review questions (check your answers with
the chapter)
• Try the exercise questions with an asterisk (solutions
are available in the appendix)
• Try the exercise questions required by your tutor
(solutions to be provided by the tutor at their
discretion)
• Try the learning activities on the student online
learning centre (www.mcgraw-hill.co.uk/textbooks/thomas)

© McGraw-Hill Education 2019