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lession 8 Irrecoverable debts and allowances

Main contents:

1.Irrecoverable debts

2.Allowance for receivables

3.Accounting for irrecoverable debts and receivable allowances

8.1 Irrecoverable debts

●Trade receivables:

A trade receivable is a customer who owes money to the business as a result of buying goods or service on credit.

●Accruals concept:

The accruals concept requires a sale to be included in the ledger accounts at the time that it is made.Credit sales are claimed when the sale is invoiced.The double entry at the invoice date will be:

Dr. 　Cr.

Receivables xx

Sales 　xx

When the customer eventually settles the invoice the double entry will be:

Dr. 　Cr.

Cash 　xx

Receivables xx

Problems: collecting the amounts owing from customers

Reasons: bankruptcy, fraud or disputes

●Prudence concept:

The prudence concept requires some adjustment to reflect the actual or potential loss arising from unpaid debts.

●Irrecoverable debt:

A debt which is considered to be uncollectible.

- Highly unlikely that the amount owed will be received.

- Written off by writing it out of the ledger accounts completely.

●Accounting for irrecoverable debts

- It is prudent to remove the irrecoverable debts from the accounts and to charge the amount as an expense for irrecoverable debts to the I.S.

- The original sales remains in the accounts as this did actually take place.

Dr.Irrecoverable debts expense xx

Cr.Receivables control account xx

Example:

Arctic Co.have total accounts receivable at the end of their accounting period of $45,000.Of these it is discovered that one, Mr.X who woes $790, has been declared bankruptcy, and another who gave his name as Mr.Jones has totally disappeared owing Arctic Co.$1,240.

Write up the ledger accounts to reflect the writing off these debts as irrecoverable.

Solution:

Dr.Irrecoverable debts expense 2,030

Cr.Receivables control account 2,030

●Accounting for irrecoverable debts recovered

Irrecoverable debts are received

When an irrecoverable debt is recovered, the accounting entry is:

Dr.Cash xx

Cr.Irrecoverable debt expense xx

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