FAF3
Syllabus D. Recording Transactions And Events D8. Receivables and payables

D8h. Create and adjust an allowance for receivables 6 / 7

Syllabus D8h)

Prepare the bookkeeping entries to create and adjust an allowance for receivables.

Doubtful Debts

If a debt is possibly irrecoverable, an allowance for the potential irrecoverability of that debt should be made

Accounting treatment

Dr Doubtful debt expense (I/S)
Cr Allowance for receivables (SOFP)

This allowance is offset against trade receivables in the statement of financial position.

Trade receivables include the amounts that are recoverable from customers upon credit sales. 

Trade receivables are presented in the statement of financial position after the deduction of allowance for bad debts.

Types of allowances

There are two types of allowance for receivables

  1. Specific allowance – an allowance against a particular receivable

  2. General allowance – a percentage allowance based on past experience of irrecoverable debts (e.g. 2% of all outstanding receivables)

Therefore, an allowance for receivables provides for future irrecoverable debts, as a prudent precaution by the business.  For both types of allowance for receivables, the double-entry still remains: -

Dr Doubtful debt expense (I/S)
Cr Allowance for receivables (SOFP)

Specific allowance

There are two situations in which a specific allowance previously done is no longer required

  • customer pays outstanding amount

  • customer goes bankrupt

Customer pays outstanding amount

Accounting treatment

Dr Cash (SOFP)
Cr Trade Receivables (SOFP)
Therefore, this will be credited to income in the statement of profit or loss or it will reduce the total expense for bad and doubtful debts.

Dr Allowance for receivables (SOFP)
Cr Doubtful debts expense (I/S)

Customer goes bankrupt

Accounting treatment

Dr Allowance for receivables (SOFP)
Cr Trade Receivables (SOFP)

Therefore, no entry is posted in the bad and doubtful debts account as this would have already been debited with the expense in the first year when we have taken the specific allowance.