CAT / FIA FFA Syllabus D. Recording Transactions And Events - Movements in allowance for receivables - Notes ^{7 / 8}

How do we calculate the general allowance?

There are a number of steps which must be followed.

1. Take the balance on the trade receivables account after posting credit sales and cash received from credit customers

2. Deduct bad debts from this balance of trade receivables

3. Deduct also any specific allowances from trade receivables

4. Calculate the general allowance by applying the percentage given to the remaining balance

General allowance – subsequent years

In subsequent years, adjustments may be needed to the amount of the allowance. The procedure to be followed then is

1. Calculate the new allowance required.

2. Compare it with the existing balance on the allowance account (i.e. the balance b/f from the previous accounting period).

3. Calculate increase or decrease required.

   (i) If a higher allowance is required now:

   Dr Irrecoverable debts expense
   Cr Allowance for receivables
    
   with the amount of the increase.

   (ii)      If a lower allowance is needed now than before:

   Dr Allowance for receivables
   Cr Irrecoverable debts expense

   with the amount of the decrease.