Receivables, irrecoverable debts & allowance
This is one of the most important practical topics in FA. In plain words: customers who owe you money, what to do when some will never pay, and how to show a fair figure on the statement of financial position. Read this slowly once — then try the calculator with the same numbers.
What you must be able to do in the exam
- Know what trade receivables are
- Update the receivables control account (the “total” of all customers)
- Write off an irrecoverable debt (bad debt) correctly
- Record money recovered from a debt that was written off earlier
- Calculate and account for the allowance for receivables
- Show net receivables in the statement of financial position (SFP)
- Show the correct expense in the statement of profit or loss (SPL / SoPL)
1. Start with the simple idea
When you sell goods or services on credit, the customer does not pay cash today. They promise to pay later. That promise is an asset for your business. We call it trade receivables (sometimes “trade debtors”).
Journal when you make a credit sale:
Debit Receivables (asset goes up)
Credit Revenue / Sales (income goes up)
Journal when the customer pays:
Debit Cash / Bank
Credit Receivables (asset goes down — they no longer owe you)
Tutor tip
Receivables are only for amounts owed by customers from trading. A loan you gave to a director is not a trade receivable. Keep that separate in the exam.
2. The receivables control account (do not skip this)
In real life you may have hundreds of customers. Each has a personal account. The control account is the total of all those personal accounts in one place. FA loves asking you to complete or balance this account.
Typical entries in the receivables control account:
| Debit side (what increases the total owed to you) | Credit side (what reduces the total owed to you) |
|---|---|
| Opening balance (customers already owed you) | Cash / cheques received from customers |
| Credit sales in the period | Sales returns (customers sent goods back) |
| Dishonoured cheques (payment bounced — they still owe you) | Irrecoverable debts written off |
| Closing balance (what is still owed at period end — this is a balancing figure, or given) |
Simple rule to remember:
Opening balance + credit sales (+ any other debit items) − cash received − returns − write-offs = closing balance.
If the question gives you almost everything, you can find the missing figure (often credit sales or cash received).
3. Irrecoverable debts (bad debts) — “this customer will never pay”
Sometimes you know a customer will not pay (business closed, person disappeared, court case lost). That amount is no longer a real asset. You must remove it from receivables and treat it as an expense.
Journal:
Debit Irrecoverable debts expense (SoPL)
Credit Receivables (or receivables control account)
After this entry, that customer’s balance is gone from your books. Your assets look more honest, and profit is lower because of the expense.
Common mix-up
An irrecoverable debt is for a specific customer you are removing completely. An allowance (next section) is a general estimate for customers who might not pay in future. Do not treat them as the same thing.
4. Debt recovered later — “they paid after we wrote them off”
Sometimes a debt you wrote off last year (or earlier this year) is paid after all. Good news: money comes in. You should not leave receivables showing that old balance again in a confusing way. The usual FA approach is:
When cash is received for a previously written-off debt:
Debit Cash / Bank
Credit Irrecoverable debts expense (or a “debts recovered” income line — follow the question’s wording)
In many exam answers, the recovery reduces the irrecoverable debts expense for the period (or is shown as income). The important idea: profit improves when money comes back.
5. Allowance for receivables — the “safety estimate”
Even after writing off clear bad debts, some remaining customers may still fail to pay. Accounting is careful: we do not wait until we are 100% sure. We create an allowance for receivables (also called allowance for doubtful debts).
Think of it like this: receivables on the books say Rs. 400,000, but you believe only about Rs. 388,000 is truly collectable. So you keep a “reserve” of Rs. 12,000 against receivables.
How it appears on the statement of financial position:
| Trade receivables (gross) | 400,000 |
| Less: Allowance for receivables | (12,000) |
| Net receivables (the figure users care about) | 388,000 |
The allowance is a credit balance (like a contra-asset). It sits against receivables. It is not cash set aside in a bank account — it is an accounting estimate.
6. The golden rule: expense is the MOVEMENT, not the full closing allowance
This is where many FA students lose marks. Please read twice.
At the end of each year, the examiner (or the scenario) tells you what the allowance should be now (for example 3% of remaining receivables, or a fixed amount).
That new figure is the closing allowance. You already had an opening allowance from last year.
SoPL charge for the allowance this year = Closing allowance − Opening allowance
- If closing is higher than opening → extra expense (Debit expense, Credit allowance)
- If closing is lower than opening → you reduce the allowance (Debit allowance, Credit expense / income)
Exam killer mistake
Do not put the whole closing allowance into the profit or loss as this year’s expense. Only the increase or decrease goes to SoPL (plus any separate write-offs of irrecoverable debts).
Example:
- Opening allowance: Rs. 15,000
- Required closing allowance: Rs. 18,000
- SoPL charge relating to the allowance: Rs. 3,000 only
Journal for the increase:
Debit Irrecoverable debts expense (or “allowance charge”) 3,000
Credit Allowance for receivables 3,000
7. Full worked example (follow the order)
Use these numbers. This is the same style as many FA questions.
| Opening receivables | 400,000 |
| Credit sales for the year | 1,500,000 |
| Cash received from customers | 1,350,000 |
| Irrecoverable debts written off (specific customers) | 20,000 |
| Debt recovered (previously written off) | 5,000 |
| Opening allowance for receivables | 15,000 |
| Closing allowance required | 18,000 |
Step A — Closing gross receivables
400,000 + 1,500,000 − 1,350,000 − 20,000 = Rs. 530,000
(Opening + sales − cash − write-offs. Recovery of an old write-off is usually cash and income; it does not rebuild the old receivable in this simple working unless the question says so.)
Step B — Allowance movement
Closing allowance 18,000 − opening 15,000 = Rs. 3,000 extra charge.
Step C — Total receivables-related expense in SoPL (simple view)
- Write-offs: 20,000
- Plus increase in allowance: 3,000
- Less recovery of old debt: (5,000)
- Net charge ≈ Rs. 18,000 (always follow how the question wants recovery presented)
Step D — SFP extract
| Trade receivables | 530,000 |
| Less: Allowance for receivables | (18,000) |
| Net trade receivables | 512,000 |
Practise the same numbers in the interactive calculator so you can see the ledger layout too.
Interactive calculator
Enter opening balances, sales, cash, write-offs, recovery, and the closing allowance method. It builds the control account, expense account, allowance account, and SFP/SPL extracts — the way you should present workings in FA.
Open Receivables Calculator ↗8. Percentage allowance — another common style
Sometimes the question says: “Allow 3% of receivables for doubtful debts” after you have already written off specific bad debts.
Order matters:
- First write off specific irrecoverable debts (reduce receivables).
- Then calculate the allowance on the remaining receivables (unless the question says otherwise).
- Then find the movement from the old allowance to this new allowance for the SoPL charge.
Example: Receivables after write-offs = 500,000. Allowance = 3%.
Closing allowance = 15,000. If opening was 10,000, SoPL charge for allowance = 5,000.
Do not double-count
If a debt is already written off, do not also include that same amount inside the percentage base as if it were still a receivable. Write-offs come first; percentage comes second on what is left.
9. How this hits the two statements (keep it clear)
Statement of profit or loss
- Irrecoverable debts written off → expense
- Increase in allowance → extra expense
- Decrease in allowance → reduces expense (or is income)
- Recovery of old written-off debt → reduces expense or is income
Statement of financial position (current assets)
- Show receivables gross, then deduct the allowance, or show one net figure if the question allows
- FA often prefers the gross and allowance shown clearly in workings
Exam traps checklist (tick these mentally in every question)
- Charging the full closing allowance as expense instead of the movement
- Writing off a debt and still including it in the allowance % base
- Forgetting that cash received reduces receivables (control account)
- Treating recovery of an old bad debt as an increase in receivables without reading the question
- Mixing up irrecoverable debt (specific write-off) with allowance (estimate)
- Putting the allowance on the wrong side of the SFP (it reduces assets; it is not a liability you “owe”)
10. Quick memory sheet
| Situation | What to do |
|---|---|
| Credit sale | Dr Receivables / Cr Sales |
| Customer pays | Dr Cash / Cr Receivables |
| Specific bad debt | Dr Expense / Cr Receivables |
| Old bad debt paid later | Dr Cash / Cr Expense (or income) |
| Allowance needs to rise | Dr Expense / Cr Allowance |
| Allowance needs to fall | Dr Allowance / Cr Expense (or income) |
| SFP figure | Gross receivables − closing allowance |
Practice quiz (try before you peek)
Important references
- ACCA FA syllabus & study guide (confirm current session wording)
- ACCA Study Hub — official chapter + practice questions
- Receivables calculator on this site — control account, allowance, SFP/SPL extracts
- Back to FA Study Hub
Exam tip from a tutor: after reading this page, open the calculator, type the worked-example numbers, and explain each line out loud as if you were teaching a classmate. If you can teach it, you can pass it.