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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

218

 

ANSWER 

The entries for the three years are denoted by (a), (b) and (c) in each account. 

TRADE RECEIVABLES (EXTRACT) 

 

 

 

$      

 

 

 

(a)  28.2.20X6  Balance 

 15,200 

 

 

 

(b)  28.2.20X7  Balance 

 17,100 

 

 

 

(c)  28.2.20X8  Balance 

 21,400

 

 

 

 

ALLOWANCE FOR RECEIVABLES 

 

 

 

  $  

 

 

 $   

(a)  28.2.20X6 Balance c/d (2% of 

15,200) 

 

304 

28.2.20X6 

 

P/L account 

 

304 

 

 

 

 

304 

 

 

 

304 

(b)  28.2.20X7 Balance c/d (2% of 

17,100) 

342 

1.3.20X6 

 

Balance b/d 

304 

 

 

 

 

28.2.20X7 

 

P/L account (note (1)) 

  38 

 

 

 

 

342 

 

 

 

342 

(c)  28.2.20X8 P/L account (note (2)) 

128 

1.3.20X7 

 

Balance b/d 

342 

 

28.2.20X8 Balance c/d (1% of 

21,400) 

 

214 

 

 

       

 

 

 

 

342 

 

 

 

342 

 

 

 

 1.3.20X8 

 

Balance b/d 

214 

PROFIT OR LOSS (EXTRACT) 

 

 

 

$    

$ 

 

28.2.20X6  Allowance for receivables 

 

304  

 

 

 

28.2.20X7  Allowance for receivables 

 

  38  

 

 

 

 

 

28.2.20X8 

Allowance for receivables

 

128

Notes 

1 

The increase in the allowance is $(342 – 304) = $38 

2 

The decrease in the allowance is $(342 – 214) = $128 

3 

We calculate the net receivables figure for inclusion in the statement of financial position as 

follows: 

 

20X6 

20X7 

20X8 

 

 

$     

 

$     

 

$     

Current assets 

 

 

 

Trade accounts receivable 

 

15,200 

 

17,100 

 

21,400 

Less allowance for receivables 

 

     304 

 

     342 

 

     214 

 

 

14,896 

 

16,758 

 

21,186 

 

2.6 Example: irrecoverable debts and allowance for receivables combined  

Consider the following example.  

Fatima's receivables at 31 May 20X7 were $723,800. The balance on the allowance for receivables 

account at 1 June 20X6 was $15,250. Fatima needs to adjust the allowance for receivables to be the 

equivalent of 1.5% of receivables at 31 May 20X7. 

On 14 May 20X7 Fatima received $540 in final settlement of an amount written off during the year 

ended 31 May 20X6. 

Required 

What total amount should be recognised for receivables in the statement of profit or loss for the year 

ended 31 May 20X7? 

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CHAPTER 12  

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  IRRECOVERABLE DEBTS AND ALLOWANCES 

 

219 

Solution 

First, note the requirement's wording 'recognised for receivables in the statement of profit or loss'. This 

means the total charge (or recovery) for irrecoverable debts and the allowance for receivables in the 

statement of profit or loss. 

Secondly, consider the allowance for receivables. 

 

 $  

Closing allowance required (723,800 × 1.5%) 

 10,857 

Opening allowance 

 (15,250) 

Reduction needed in allowance 

   (4,393) 

Remember that a reduction to the allowance for receivables is a credit to the statement of profit or loss. 

Thirdly, the amount received of $540 had already been written off the previous year and now needs to 

be credited to irrecoverable debts. 

Therefore the total credit to the statement of profit or loss = 540 + 4,393 = $4,933 

 

2.7 Question to test your learning 

You should now try to use what you have learned to attempt a solution to the following exercise, which 

involves preparing a statement of profit or loss and statement of financial position. 

QUESTION 

Newbegin tools

 

The financial affairs of Newbegin Tools prior to the commencement of trading were as follows. 

NEWBEGIN TOOLS 

STATEMENT OF FINANCIAL POSITION AS AT 1 AUGUST 20X5 

 

 

$     

 

$     

Assets 

 

 

 

Non-current assets 

 

 

  

Motor vehicle 

  

2,000 

 

  

Shop fittings 

  

3,000 

 

 

 

  

5,000 

 

Current assets 

 

 

  

Inventories 

  

12,000 

 

  

Cash 

  

 1,000 

 

 

 

  

13,000 

 

 

  

18,000 

Equity and liabilities 

 

 

Equity 

 

  

12,000 

Current liabilities 

 

 

  

Bank overdraft 

  

2,000 

 

  

Trade payables 

  

4,000 

 

 

 

  

  6,000 

Total equity and liabilities 

 

  

18,000 

At the end of six months the business had made the following transactions. 

(a) 

Goods were purchased on credit for $10,000. 

(b) 

Closing inventories were valued at $5,450. 

 EXAM FOCUS POINT 

It is highly likely that you will get a question like this in the exam. Make sure you understand the 

solution. 

The FFA/FA examining team have written a technical article entitled 'Trade receivables', last updated in 

March 2017. This article is helpful to your understanding of the entire process of credit sales, from the 

initial recording of a credit sale to the recognition of an allowance for the receivable. 

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