Adjustments for Allowances for Irrecoverable Debts (Cambridge International A-Level Accounting)

Spec point — how to calculate and record the adjustments needed and the effect on financial statements in respect of: – irrecoverable debts, irrecoverable debts recovered and allowance for irrecoverable debts

Adjustments for allowances for irrecoverable debts

How do I record the allowances for irrecoverable debts on the financial statements?

• Calculate the allowance for irrecoverable debts at the end of the current year

  • See the revision note Allowance for Irrecoverable Debts for more information

• Calculate the difference between:

  • The allowance for irrecoverable debts at the start of the year

    • This value will be on the trial balance

  • And the allowance for irrecoverable debts at the end of the year

    • This is the value that you need to calculate

• The difference is the value that is stated on the statement of profit or loss

  • If the allowance for irrecoverable debts increases, the increase is listed with the expenses

    • Label it allowance for irrecoverable debts

  • If the allowance for irrecoverable debts decreases, the decrease is listed with the other income

    • Label it reduction in allowance for irrecoverable debts

• Record the new balance for the allowance for irrecoverable debts on the statement of financial position

  • List it underneath trade receivables in the current assets section
  • Subtract the allowance from the value for trade receivables

Worked Example Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up an allowance for irrecoverable debts which is to be maintained at 4% of trade receivables.

(a) Prepare an extract from the statement of profit or loss for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.

(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the statement of profit or loss for the year ended 31 December 2023.

Answer:

(a)

• Calculate the allowance for irrecoverable debts

4% × $24 000 = $960

• This is an increase from $0

  • It will appear as an expense on the statement of profit or loss

Final answer: Clara Final answer: Statement of Profit or Loss (extract) for the year ended 31 December 2022
	Final answer: $
Final answer: Expenses
Final answer: Allowance for irrecoverable debts	Final answer: 960

Final answer: Clara Final answer: Statement of Financial Position (extract) at 31 December 2022
Final answer: Current Assets	Final answer: $**	Final answer: **$
Final answer: Trade receivables	Final answer: 24 000
Final answer: Less: allowance for irrecoverable debts	Final answer: 960	Final answer: 23 040

(b)

• Calculate the new allowance for irrecoverable debts

4% × $22 000 = $880

• Calculate the difference from the previous allowance for irrecoverable debts

$960 - $880 = $80

• This is a decrease

  • It will appear as other income on the statement of profit or loss

Final answer: Clara Final answer: Statement of Profit or Loss (extract) for the year ended 31 December 2023
	Final answer: $
Final answer: Other income
Final answer: Reduction in allowance for irrecoverable debts	Final answer: 80