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Receivables

Allowance for receivables

3.1 Estimating the allowance for receivables

Whilst some debts are definitely irrecoverable, others may only be doubtful. If this is
the case it would not be appropriate to eliminate the receivable balance because the
credit customer may still pay. However, we do have to recognise that the balance on
the receivables account is probably less than it appears to be, this is in line with the
prudence concept. The technique used is to create an allowance for receivables.

The accounting entries required to create an allowance for receivables are:

Debit Irrecoverable debts expense

Credit Allowance for receivables

An allowance should only be accounted for when there is evidence of the full amount
due may not be recovered, but it is not yet regarded as irrecoverable. There will be
some specific amounts or debts where the customer is known to be in financial
difficulties, or is disputing their invoice, or is refusing to pay for some other reason
(bad service for example), and therefore the amount owing may not be fully
recovered. The allowance for such a debt is sometimes referred to as a specific
allowance.

Note that general allowances for receivables should no longer be recognised in the
financial statements.

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