ACCA

KNOWLEDGE
LEVEL

Subject Financial Accounting (FA/F3)

Suran Patabendige
Lecturer MBA (UK), B.Sc Accountancy special (USJP), ACMA, CGMA

Module Study Session 11 - Receivables

Code FA/SP/19
 Chapter-11
Receivables

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01. Cash and credit sales

If a sale is for cash, the customer pays for the goods/services at the point of sale. The double
entry for a cash sales is:

Dr Cash
Cr Sales revenue

If the sale is on credit terms the customer will pay for the goods/services after receiving them.
Typically trading terms allow customers 30 60 days when purchasing goods and services on
credit. Under the accruals concept, the sale is recorded in the ledger accounts when the right to
the income is earned. That is usually the point at which the goods/services are delivered.
Therefore when sales are made on credit the revenue is recorded with a corresponding asset that
represents the customer's commitment to pay. The asset is referred to as a 'receivable.'
The double entry is recorded as follows:

Dr Receivables
Cr Sales revenue

When the customer eventually settles the debt the double entry will be:

Dr Cash account
Cr Receivables

This then clears out the balance on the customer’s account.

Advantages of offering credit

o The business may be able to enter new markets.
o There is a possibility of increased sales.
o Customer loyalty may be encouraged.

Costs of offering credit

o Can be costly in terms of lost interest since the business is accepting payment
later.
o Cash flow of the business may deteriorate.
o There is a potential risk of irrecoverable debts.

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02. Aged receivable analysis
Where credit facilities are offered, it is normal for a business to maintain an aged
receivables analysis.
• Analysis is usually a list, ordered by name, showing how much each customer owes
and how old their debts are.
• The credit control function of a business uses the analysis to keep track of outstanding
debts and follow up any that are overdue.
• Timely collection of debts improves cash flow and reduces the risk of them becoming
irrecoverable.

03. Irrecoverable debts and allowances

An irrecoverable debt is a debt which is, or is considered to be, uncollectable.

With such debts it is prudent to remove them from the accounts and to charge the amount as an
expense for irrecoverable debts to the income statement. The original sale remains in the
accounts as this did actually take place.

The double entry required to achieve this is:

Dr Irrecoverable debts expense

Cr Receivables

When an irrecoverable debt is recovered, the credit entry (above) cannot be taken to receivables as
the debt has already been taken out of th receivables balance.
Instead the accounting entry is:

Dr Cash
Cr Irrecoverable debts expense

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Doubtful debts

Some businesses may wish to keep a separate ‘irrecoverable debts recovered’ account to
separate the actual cost of irrecoverable debts in the period.

If there is concern over whether a customer will pay but there is still hope that the amount (or at
least some of it) can be recovered an 'allowance' is created. Unlike an irrecoverable debt, these
items are left in the receivables ledger but a separate and opposite account (receivables are
debits, the allowance is a credit) is set up that temporarily offsets the asset. If the balance is
eventually paid the allowance can be easily removed. This course of action would be necessary if
a customer was having cash flow difficulties but still felt they would be able to pay if given a little
time

An allowance for receivables is set up with the following journal:

Dr Irrecoverable debts expense

Cr Allowance for receivables

If there is already an allowance for receivables in the accounts (opening allowance), only the
movement in the allowance is charged to the statement of profit or loss (closing allowance less
opening allowance).

As the allowance can increase or decrease, there may be a debit or a credit in the irrecoverable
debts account so the above journal may be reversed

When calculating and accounting for a movement in the allowance for receivables, the following
steps should be taken:

(1) Write off irrecoverable debts.

(2) Calculate the receivables balance as adjusted for the write-offs.
(3) Ascertain the allowance for receivables required.
(4) Compare to the brought forward allowance.
(5) Account for the change in allowance to determine the expense or credit to the statement of
profit or loss
(6) In the financial statements, deduct the closing allowance for receivables from the
receivables balance

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 Questions

01. Araf & Co have total accounts receivable at the end of their accounting period of
$45,000. Of these it is discovered that one, Mr Xiun who owes $790, has been declared
bankrupt, and another who gave his name as Mr Jones has totally disappeared owing
Araf & Co $1,240.

Calculate the effect in the financial statements of writing off these debts as irrecoverable.

02. Celia Jones had receivables of $3,655 at 31 December 20X7. At that date she wrote off a
debt from Lenny Smith of $699. During the year to 31 December 20X8 Celia made credit
sales of $17,832 and received cash from her customers totalling $16,936. She also
received the $699 from Lenny Smith that had already been written off in 20X7

What is the final balance on the receivables account at 31 December 20X7 and 20X8?
20X7 20X8
$ $
A. 2,956 3,852
B. 2,956 3,153
C. 3,655 4,551
D. 3,655 3,852

03. John Stamp has opening balances at 1 January 20X6 on his trade receivables account and
allowance for receivables account of $68,000 and $3,400 respectively. During the year to
31 December 20X6 John Stamp made credit sales of $354,000 and collected cash from his
receivables of $340,000.

At 31 December 20X6 John Stamp reviewed his receivables listing and acknowledged that
he is unlikely ever to receive debts totalling $2,000. These are to be written off as
irrecoverable. In addition, at that date he estimated that amounts totalling $4,000 were
overdue and that an allowance for receivables was required to cover these amounts.
What is the amount charged to John’s statement of profit or loss for irrecoverable debt
expense in the year ended 31 December 20X6?

A. $2,700
B. $6,100
C. $2,600
D. $6,000

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 04. At 31 December 20X2 a company's receivables totalled $400,000 and an allowance for
receivables of $50,000 had been brought forward from the year ended 31 December
20X1. It was decided to write off debts totalling $38,000 and to adjust the allowance for
receivables to 10% of the receivables. What charge for receivables expense should appear
in the company's statement of profit or loss for the year ended 31 December 20X2?
A. $74,200
B. $51,800
C. $28,000
D. $24,200

05. At 1 July 20X2 the receivables allowance of Q was $18,000. During the year ended 30 June
20X3 debts totalling $14,600 were written off. It was decided that the receivables
allowance should be $16,000 as at 30 June 20X3.

What amount should appear in Q's statement of profit or loss for receivables expense
for the year ended 30 June 20X3?

A. $12,600
B. $16,600
C. $48,600
D. $30,600

06. At 30 September 20X2 a company's allowance for receivables amounted to $38,000,

which was five per cent of the receivables at that date. At 30 September 20X3 receivables
totalled $868,500. It was decided to write off $28,500 of debts as irrecoverable and to
keep the allowance for receivables at five per cent of receivables. What should be the
charge in the statement of profit or loss for the year ended 30 September 20X3 for
receivables expense?

A. $42,000
B. $33,925
C. $70,500
D. $32,500

07. At 1 July 20X3 a limited liability company had an allowance for receivables of $83,000.
During the year ended 30 June 20X4 debts totalling $146,000 were written off. At 30 June
20X4 it was decided that a receivables allowance of $218,000 was required. What figure
should appear in the company's statement of profit or loss for the year ended 30 June
20X4 for receivables expense?
A. $155,000
B. $364,000
C. $281,000
D. $11,000

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 08. A company has received cash for a debt that was previously written off. Which of the
following is the correct double entry to record the cash received?
Debit Credit
A. Irrecoverable debts expense Accounts receivable
B. Cash Irrecoverable debts expense
C. Allowance for receivables Accounts receivable
D. Cash Allowance for receivables

09. Which of the following would a decrease in the allowance for receivables result in?
A. An increase in liabilities
B. A decrease in working capital
C. A decrease in net profit
D. An increase in net profit

10. An increase in an allowance for receivables of $8,000 has been treated as a reduction in
the allowance in the financial statements. Which of the following explains the resulting
effects?
A. Net profit is overstated by $16,000, receivables overstated by $8,000
B. Net profit understated by $16,000, receivables understated by $16,000
C. Net profit overstated by $16,000, receivables overstated by $16,000
D. Gross profit overstated by $16,000, receivables overstated by $16,000

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