IGC-L18: Irrecoverable Debts & Allowance for Receivables
Accounting for bad debts and applying the allowance method correctly
Learning Objectives
- Define irrecoverable debts
- Explain the need for an allowance for receivables
- Calculate new allowance adjustments
- Record journal entries correctly
- Understand impact on profit and Statement of Financial Position
Concept Framework
Irrecoverable Debts
Irrecoverable debts (bad debts) arise when a customer fails to pay the amount owed.
Treatment:
Debit Irrecoverable Debts Expense
Credit Trade Receivables
This reduces profit.
Allowance for Receivables
Businesses estimate that some debts may become irrecoverable in the future.
An allowance is created to apply the prudence principle.
Calculation of Allowance
Allowance is usually calculated as a percentage of trade receivables.
Example: 5% of receivables.
Adjustment of Allowance
If new allowance is higher than previous allowance → increase expense.
If new allowance is lower than previous allowance → reduce expense.
Only the change is recorded in the Income Statement.
Presentation
Income Statement:
Irrecoverable debts expense + change in allowance
Statement of Financial Position:
Trade Receivables
Less: Allowance for Receivables
= Net Realisable Value
Worked Examples
Example 1 — Writing Off Debt
A debt of £1,200 is irrecoverable.
Journal Entry:
Debit Irrecoverable Debts £1,200
Credit Trade Receivables £1,200
Example 2 — Adjusting Allowance
Trade Receivables £20,000
Allowance required 5%
Required allowance = £1,000
Previous allowance = £700
Increase required = £300
Journal Entry:
Debit Income Statement £300
Credit Allowance for Receivables £300
📌 Additional allowance and bad debt calculations are available in the 🎯 Premium Resources and Guess Papers + YouTube Explanation section.
Structured Practice
Level 1 – Concept Check
Define irrecoverable debt.
Why is allowance for receivables created?
State how allowance is calculated.
Level 2 – Application Practice
Trade Receivables £25,000
Allowance required 4%
Existing allowance £800
Calculate adjustment required.
Level 3 – Examination Style Question
Explain why the allowance method follows the prudence principle. (6 marks)
📌 Additional structured bad debt questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured Errors and Suspense Account questions are available in the Premium Resources and Guess Papers and YouTube Explanation section. Students should practise journal corrections and Suspense Account preparation regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn – Unlearn – Relearn Approach
If you believe you have already mastered this topic, attempt the following without referring to notes.
If you are unable to answer confidently, revisit the lesson before proceeding.
A debt £2,500 is written off. Show the journal entry and explain impact on profit.
Trade Receivables £40,000; allowance required 5%; previous allowance £1,200. Calculate adjustment.
Explain how failure to create allowance affects financial statements.
Why is allowance deducted from receivables in the Statement of Financial Position?
Detailed Activity Solutions
Solution to Structured Practice
Adjusted rent expense:
10,000 – 2,000 = £8,000
Prepaid rent £2,000 shown as current asset.
Solutions to Proficiency Check
Solutions to Proficiency Check
Debit Irrecoverable Debts £2,500
Credit Trade Receivables £2,500
Profit decreases by £2,500.
Required allowance = £2,000
Increase required = 2,000 – 1,200 = £800
Receivables would be overstated and profit overstated.
To show receivables at net realisable value.
Marking Logic
2 marks – Correct calculation
2 marks – Logical explanation
2 marks – Evaluation
How This Topic Appears in the Examination
This topic is commonly assessed in:
• Paper 2 allowance calculations
• Journal entries for bad debts
• Prudence principle explanation questions
Examiners frequently assess:
Correct calculation
Accurate adjustment
Understanding of presentation
Students should practise allowance adjustments regularly and review video explanations for clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I can write off irrecoverable debts correctly
- I can calculate allowance adjustments accurately
- I understand prudence principle
- I can present receivables correctly
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