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

In subsequent years, adjustments may be needed to the amount of the allowance. The procedure to be 

followed then is as follows. 

(a) 

Calculate the new allowance required 

(b) 

Compare it with the existing balance on the allowance account (ie the balance b/f from the 

previous accounting period) 

(c) 

Calculate increase or decrease required 

(i) 

If a higher allowance is required now:  

DEBIT 

Irrecoverable debts expense (statement of profit or loss) 

CREDIT 

Allowance for receivables (statement of financial position) 

with the amount of the increase 

(ii) 

If a lower allowance is needed now than before: 

DEBIT 

Allowance for receivables (statement of financial position) 

CREDIT 

Irrecoverable debts expense (statement of profit or loss) 

with the amount of the decrease 

2.5 Example: accounting entries for allowance for receivables 

Alex Gullible has total receivables outstanding at 31 December 20X2 of $28,000. He has calculated 

that the equivalent of 1% of the these balances might not be collected and wishes to make an 

appropriate allowance. Before now, he has not made any allowance for receivables at all. 

On 31 December 20X3 his trade accounts receivable amounted to $40,000. Upon reviewing the 

balances, he calculated that an allowance should be made equivalent to 5% of the total balance. 

What accounting entries should Alex make on 31 December 20X2 and 31 December 20X3, and what 

figures for trade receivables will appear in his statements of financial position as at those dates? 

Solution

 

At 31 December 20X2 

Allowance required =  1% × $28,000 

 

=  $280 

Alex will make the following entries. 

DEBIT 

Irrecoverable debts expense (statement of profit or loss) 

$280 

 

CREDIT 

Allowance for receivables (statement of financial position) 

 

$280 

Receivables will appear as follows under current assets. 

 

$ 

Receivables ledger balances 

28,000 

Less allowance for receivables 

     (280) 

 

 27,720 

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