Bad Debts and Allowance for Receivables
Sales
If a sale is for cash, The double entry would be :
Dr Cash
XX
Cr Sales revenue
XX
If the sale is on credit terms the customer will pay for the goods/services after
receiving them.
The double entry is recorded as follows:
Dr Receivables
XX
Cr Sales revenue XX
When the customer eventually settles the debt the double entry will be:
Dr Cash account XX
Cr Receivables
XX
This then clears out the balance on the customer’s account.
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Bad Debts and Allowance for Receivables
Accrual concept
The accruals concept dictates that when a sale is made, it is recognised in the
accounts, regardless of whether or not the cash has been received.
 Occasionally customers either refuse to or cannot settle their
outstanding debts
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Bad Debts and Allowance for Receivables
Bad debt / Irrecoverable debts
If it is highly unlikely that the amount owed by a customer will be received,
then this debt is known as an irrecoverable debt.
An irrecoverable debt is a debt which is, or is considered to be, uncollectable.
The double entry required to achieve this is:
Dr Irrecoverable debts expense xx
Cr Receivables
xx
With such debts it is prudent to remove them from the receivable accounts
and to charge the amount as an expense for irrecoverable debts to the
statement of profit or loss.
Irrecoverable debts recovered
There is a possible situation where a debt is written off as irrecoverable in one
accounting period, perhaps because the customer has been declared bankrupt,
and the money, or part of the money, due is then unexpectedly received in a
subsequent accounting period.
Accounting entry will be:
Dr Cash
xx
Cr Irrecoverable debts expense
xx
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Bad Debts and Allowance for Receivables
Allowance for receivables
 If there is concern over whether a customer will pay but there is still
hope that the amount (or at least some of it) can be recovered an
'allowance' is created.
 It is prudent to recognise the possible expense of not collecting the debt
in the statement of profit or loss, but the receivable must remain in the
accounts in case the customer does, in fact, settle the amount
outstanding.
 An allowance is set up which is a credit balance
 This is netted off against trade receivables in the statement of financial
position to give a net figure for receivables that are probably
recoverable.
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Bad Debts and Allowance for Receivables
An allowance for receivables is set up with the following journal:
Dr Irrecoverable debts expense
XX
Cr Allowance for receivables
XX
Increase in allowance
Dr Irrecoverable debts expense
XX
Cr Allowance for receivables
XX
Decrease in allowance
Dr Allowance for receivables
XX
Cr Irrecoverable debts expense
XX
Summary of this topic
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