Page 243 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Accounting for irrecoverable debts and allowances for receivables

Compound instruments

3.1 Estimating the allowance for receivables

While 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 pay after all. However, we do have to recognise that the balance
on the receivables account is probably less than it appears to be. The technique
used is to create an allowance for receivables.

The double entry to create an allowance for receivables will be:

Debit Irrecoverable debts expense account

Credit Allowance for receivables account

237