I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

increase in allowance is charged as an expense in the statement of profit or loss for the period in 

which the increased allowance is made. 

(c) 

When an allowance already exists, but is subsequently reduced in size, the amount of the 

decrease in allowance is credited back to the statement of profit or loss for the period in which 

the reduction in allowance is made. 

 

The statement of financial position, as well as the statement of profit or loss of a business, must be 

adjusted to show the allowance. 

 

This is because the net realisable value of all the receivables of the business is estimated to be less than 

their 'sales value'. After all, this is the reason for making the allowance in the first place. The net 

realisable value of trade accounts receivable is the total value of receivables minus receivables 

allowance.  

For example, a company has a trade receivables balance of $50,000 but requires an allowance for 

receivables equivalent to 5% of the balance. Therefore the allowance for receivables will be 5% of 

$50,000 = $2,500. This means that although total trade receivables are $50,000, eventual payment 

of only $47,500 is expected. 

(a) 

In the statement of profit or loss, the newly created allowance of $2,500 will be shown as an 

expense. 

(b) 

In the statement of financial position, trade receivables will be shown as: 

 

$      

Trade receivables (50,000 – 2,500) 

 

47,500 

 IMPORTANT 

The value of trade receivables in the statement of financial position must be shown after deducting the 

allowance for receivables.