ACCA F3. Provided by Academy of Professional Accounting (APA) Financial Accounting (FA) 财务会计第十五讲. ACCA Lecturer: Carrie NI

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1 Professional Accounting Education Provided by Academy of Professional Accounting (APA) ACCA F3 Financial Accounting (FA) 财务会计第十五讲 ACCA Lecturer: Carrie NI ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com

2 D8: Irrecoverable Debts and Allowances Irrecoverable debts Allowances for receivables 2

3 Irrecoverable Debts Introduction Ideally a business wants to receive money from its customers as quickly as possible, but delay paying its suppliers for as along as possible. This can lead to problems. Most businesses aim to control such problems by means of credit control. Customer will be given a credit limit, which cannot be exceeded. Another tool in credit control is the age receivables analysis. 3

4 Irrecoverable Debts Introduction Irrecoverable debts are specific debts owed to a business which it decides are never going to be paid. They are written off as an expense in the statement of profit or loss. 4

5 Irrecoverable Debts Writing off irrecoverable debts When a sale on credit is made to a customer: Dr Trade receivables Cr Sales When cash is received: Dr Cash account Cr Trade receivables But if the customer goes bankrupt and then can t pay, the irrecoverable debt should be written off: Dr Irrecoverable debts expense (SOPL) Cr Trade receivables (SOFP) 5

6 Irrecoverable Debts Learning example Fight & Co. has trade receivables at 31 December 20x7 of $65,000. A review of customer files indicates that two customers, Ali and Tyson, which owe $7,000 and $8,000 respectively, have gone bankrupt and their debts are considered irrecoverable. Required a) Calculate the balance c/d on the trade receivables account at the end of the year. b) Calculate the irrecoverable debt expense shown in the statement of profit or loss. 6

7 Irrecoverable Debts Effect in subsequent periods If an irrecoverable debt previously written off is recovered, the accounting treatment from the original write-off is reverse. 7

8 Irrecoverable Debts Accounting treatment Cash received Dr Cash Cr Trade receivables Reverse original write off Dr Trade receivables Cr Irrecoverable debt expense OR Short method Dr Cash Cr Irrecoverable debt expense 8

9 Allowance for Receivables Doubtful debts A doubtful debt is a debt which is possibly irrecoverable. In this situation, a provision, known as an allowance for receivables, is made against the doubtful debt. Allowance for receivables. An amount in relation to receivables that reduces the receivables asset to its prudent valuation in the statement of financial position. It is offset against trade receivables, which are shown at the net amount. Allowance for receivables may be specific (an allowance against a particular receivables) or simply a percentage allowance based on past experience of irrecoverable debts, which is known as a general allowance. 9

10 Allowance for Receivables Types of allowance a) Specific: provided against a particular/named individual customer. b) General: percentage applied to total trade receivables after: I. Writing off irrecoverable debts; II. Deducting full balance of any customers for which specific allowance has been created. 10

11 Allowance for Receivables Accounting treatment Dr Irrecoverable debts expense (P/L) Cr Allowance for receivables (SOFP) On SOFP: Receivables Allowance X (X) X 11

12 Allowance for Receivables Learning example A business trade receivables account showed a year end balance of $47,440. It was decided that amounts totaling $340 should be written off as irrecoverable, a specific allowance was to be made against an amount of $400 due from Dodgy Co., a customer, and a general allowance of 2% was to be made against remaining debts. Required a) Calculate the allowance for receivables shown in the statement of financial position. b) Calculate the irrecoverable debts expense shown in the statement of profit or loss. 12

13 Allowance for Receivables Effect in subsequent periods Doubtful debts general allowance Allowance is usually changed at the end of each period to reflect the change in value of total trade receivables. Increase/decrease opening allowance to arrive at required closing allowance: Increase: Dr Irrecoverable debts expense Cr Allowance for receivables Decrease: Dr Allowance for receivables Cr Irrecoverable debts expense 13

14 Allowance for Receivables Effect in subsequent periods Doubtful debts specific allowance least year, customer pays outstanding amounts this year. A credit entry for the cash is made to the trade receivables account because the debt is still included in the total trade receivables figure. The allowance is then reversed as it is no longer needed. Account treatment Record the cash received Dr Cash (SOFP) Cr Trade receivables (SOFP) Remove allowance Dr Allowance for receivables (SOFP) Cr Irrecoverable debts expense (P/L) 14

15 Allowance for Receivables Effect in subsequent periods Learning example A business trade receivables account showed a year end balance of $47,440. It was decided that amounts totaling $340 should be written off as irrecoverable, a specific allowance was to be made against an amount of $400 due from Dodgy Co., a customer, and a general allowance of 2% was to be made against remaining debts. Required Show the accounting treatment for the business if, having made a specific allowance (see learning example), during the next year Dodgy Co. repays his debt of $400 to the business in cash? 15

16 Allowance for Receivables Effect in subsequent periods Doubtful debts - specific allowance last year, goes bad this year This debt is no longer doubtful, but definitely bad. It should therefore be removed from the trade receivables and the allowance for receivables accounts. Dr Allowance for receivables (SOFP) Cr Trade Receivables (SOFP) 16

17 Allowance for Receivables Learning example At 31 December 20x7, Briony s receivables account in the nominal ledger shows a balance of $14,670. She wishes to write off Gaby s debt of $1,000 and make an allowance of 50% against John s debt of $440 and 75% against Helen s debt of $240. She maintains a 4% general allowance. The balance brought forward on the allowance for receivables account was $1,250. What amount is charged to Briony s statement of profit or loss in respect of the above? A. $1,920 B. $1,330 C. $680 D. $737 17

18 Summary 18

19 Professional Accounting Education Provided by Academy of Professional Accounting (APA)

ACCA F8. Provided by Academy of Professional Accounting (APA) Audit and Assurance (AA) 审计与鉴证业务第 7 讲 ACCA Lecturer: Andy Qu

ACCA F8. Provided by Academy of Professional Accounting (APA) Audit and Assurance (AA) 审计与鉴证业务第 7 讲 ACCA Lecturer: Andy Qu Professional Accounting Education Provided by Academy of Professional Accounting (APA) ACCA F8 Audit and Assurance (AA) 审计与鉴证业务第 7 讲 ACCA Lecturer: Andy Qu ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com