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

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

216

 

At 31 December 20X3 

Following the procedure described above, Alex will calculate as follows. 

 

 

$ 

Allowance required now (5% × $40,000) 

 

2,000 

Existing allowance 

 

  (280) 

 Additional allowance required 

 

1,720 

He will make the following entries. 

DEBIT Irrecoverable 

debts 

expense 

$1,720 

 

CREDIT 

Allowance for receivables 

 

$1,720 

The allowance account will now appear as follows. 

 

ALLOWANCE FOR RECEIVABLES (SOFP) 

20X2  

 

$ 

  

    

 

20X2 

 

 

$      

31 Dec 

 

Balance c/d 

 

   280 

 

31 Dec 

 

P/L account 

 

   280 

20X3 

 

 

 

20X3 

 

 

31 Dec 

 

Balance c/d 

 

2,000 

 

1 Jan 

 

Balance b/d 

 

280 

 

 

 

          

 

31 Dec 

 

P/L account 

 

1,720 

 

 

 

2,000   

 

 

2,000 

 

 

 

 

20X4 

 

 

 

 

 

 

1 Jan 

 

Balance b/d 

 

2,000 

Trade receivables will be valued as follows. 

 

 

$      

Receivables ledger balances 

 

40,000 

Less allowance for receivables 

   2,000 

 

 38,000 

In practice, it is unnecessary to show the total receivables balances and the allowance as separate items in 

the statement of financial position. Normally it shows only the net figure ($27,720 in 20X2, $38,000 

in 20X3).  

Now try the following questions on allowance for receivables for yourself. 

QUESTION 

Receivables allowance I

 

Corin Flake owns and runs the Aerobic Health Foods Shop in Dundee. He commenced trading on  

1 January 20X1, selling health foods to customers, most of whom make use of a credit facility that 

Corin offers. (Customers are allowed to purchase up to $200 of goods on credit but must repay a certain 

proportion of their outstanding debt every month.) 

This credit system gives rise to a large number of irrecoverable debts, and Corin Flake's results for his 

first three years of operations are as follows.  

Year to 31 December 20X1 

 

Gross profit 

$27,000 

Irrecoverable debts written off 

$8,000 

Debts owed by customers as at 31 December 20X1 

$40,000 

Allowance for receivables 

 2½% of outstanding receivables 

Other expenses 

$20,000 

Year to 31 December 20X2 

 

Gross profit 

$45,000 

Irrecoverable debts written off 

$10,000 

Debts owed by customers as at 31 December 20X2 

$50,000 

Allowance for receivables 

2½% of outstanding receivables 

Other expenses 

$28,750 

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CHAPTER 12  

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  IRRECOVERABLE DEBTS AND ALLOWANCES 

 

217 

Year to 31 December 20X3 

 

Gross profit 

$60,000 

Irrecoverable debts written off 

$11,000 

Debts owed by customers as at 31 December 20X3 

$30,000 

Allowance for receivables 

3% of outstanding receivables 

Other expenses 

$32,850 

Required 

For each of these three years, prepare the statement of profit or loss of the business, and state the value 

of trade receivables appearing in the statement of financial position as at 31 December. 

ANSWER 

AEROBIC HEALTH FOODS SHOP 

STATEMENTS OF PROFIT OR LOSS FOR THE YEARS ENDED 31 DECEMBER  

 

 

20X1 

 

20X2 

 

20X3 

 

 

$      

 

$     

 

$      

 

$      

 

$      

 

$      

Gross profit 

 

 

27,000

 

 

45,000 

 

 

60,000 

Expenses: 

 

 

 

 

 

Irrecoverable debts written off 

 

8,000 

 

10,000 

 

 

11,000 

 

Increase/decrease in  

 

 

 

 

 

   allowance for receivables*

 

 

1,000 

 

250 

 

 

(350) 

 

Other expenses   

 

20,000 

 

28,750 

 

 

32,850 

 

 

 

  

29,000

 

 

39,000 

 

 

43,500 

Profit/(loss) for the year 

 

 

 (2,000)

 

 

  6,000 

 

 

16,500 

* At 1 January 20X1 when Corin began trading, the allowance for receivables was nil. At 31 December 

20X1 the allowance required was 2½% of $40,000 = $1,000. The increase in the allowance is therefore 

$1,000. At 31 December 20X2 the allowance required was equivalent to 2½% of $50,000 = $1,250. 

The 20X1 allowance must therefore be increased by $250. At 31 December 20X3 the allowance required 

is equivalent to 3% × $30,000 = $900. The 20X2 allowance is therefore reduced by $350. 

VALUE OF TRADE RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION 

 As 

at 

31.12.20X1 

As at 

31.12.20X2 

As at 

31.12.20X3 

 

$ 

$ 

$ 

Total value of receivables 

 

40,000 

 

50,000 

 

30,000 

Less allowance for receivables 

 

  1,000 

 

  1,250 

 

    900 

Statement of financial position value 

 

39,000 

 

48,750 

 

29,100 

 

QUESTION 

Receivables allowance II 

 

Horace Goodrunning fears that his business will suffer an increase in defaulting receivables in the future 

and so he needs to make an allowance for receivables equivalent to 2% of outstanding trade receivables 

at the reporting date from 28 February 20X6. On 28 February 20X8, Horace determines that the 

allowance has been overestimated and he recalculates it to be the equivalent of 1% of outstanding trade 

receivables. Outstanding receivables balances at the various reporting dates are as follows. 

 

$       

28.2.20X6 15,200 

28.2.20X7 17,100 

28.2.20X8 21,400 

Required 

Show extracts from the following ledger accounts for each of the three years above. 

(a) Trade 

receivables 

(b) 

Allowance for receivables 

(c) 

Profit or loss account 

Show how receivables would appear in the statement of financial position at the end of each year. 

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