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Irrecoverable debts written off 

9,000 

Debts paid in 20X5 which were previously written off as irrecoverable in 20X4 

2,000 

Other expenses 

31,800 

Trade receivables 

24,000 

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CHAPTER 12  

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  IRRECOVERABLE DEBTS AND ALLOWANCES 

 

213 

BLACKSMITH'S FORGE 

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31.12.20X5 

 

 $       

 $      

Revenue 

 

 170,000

Opening inventory 

 6,000 

Purchases 

 122,000 

 

 128,000 

Less closing inventory 

 

 

   8,000 

Cost of goods sold 

 

 120,000

Gross profit 

 

  50,000

 

 

 

Expenses 

 

  

Irrecoverable debts expense (9,000 – 2,000) 

 7,000 

  Other 

expenses 

 31,800 

 

 

  

 

38,800

Profit for the year 

 

  11,200

 

 

STATEMENT OF FINANCIAL POSITION (EXTRACT) 

 

Trade receivables (24,000 – 9,000) 

 

 

 

15,000

 

 

 

2

   Allowances for receivables 

In addition to irrecoverable debts, a business may make an allowance for receivables as a prudent 

precaution to account for the fact that some receivables balances might not be collectable. 

An increase in the allowance for receivables is shown as an expense in the statement of profit or loss. 

Trade receivables in the statement of financial position are shown net of any receivables allowance. 

2.1 Doubtful debts 

Irrecoverable debts are specific debts which are definitely not expected to be paid. However, there may 

be some debts which the business thinks might not be paid; these are known as doubtful debts. 

A

 doubtful debt

 is a debt which is possibly irrecoverable.  

Doubtful debts may occur, for example, when an invoice is in dispute, or when a customer is in financial 

difficulty.  

In this situation, the debt is not written off, as it is not certain that the debt is irrecoverable. But because 

there is doubt over whether the debt will be paid, an allowance for receivables is made against the 

doubtful debt.  

Allowance for receivables

.

 An impairment amount in relation to receivables that reduces the 

receivables asset to its recoverable amount in the statement of financial position. It is offset against 

trade receivables, which are shown at the net amount. 

An allowance for receivables accounts for potential irrecoverable debts, as a prudent precaution by the 

business. The business will therefore be more likely to avoid claiming profits which subsequently fail to 

materialise because some specific debts turn out to be irrecoverable. 

You may sometimes see an allowance for receivables referred to as a bad debt provision. This term is 

not correct, since it is not a provision. A provision must be a liability (see Chapter 11) which is not the 

case here.  

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