Irrecoverable Debts (Edexcel IGCSE Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Adjustments for Provisions for Irrecoverable Debts
How do I record the provision for irrecoverable debts on the financial statements?
Calculate the provision for irrecoverable debts at the end of the current year
Calculate the difference between:
The provision for irrecoverable debts at the start of the year
This value will be on the trial balance
And the provision for irrecoverable debts at the end of the year
This is the value that you need to calculate
The difference is the value that is stated on the income statement
If the provision for irrecoverable debts increases, the increase is listed with the expenses
Label it provision for irrecoverable debts
If the provision for irrecoverable debts decreases, the decrease is listed with the other income
Label it provision for irrecoverable debts
Record the new balance for the provision for irrecoverable debts on the statement of financial position
List it underneath trade receivables in the current assets section
Subtract the provision from the value for trade receivables
Which accounting concepts are used when recording the provision for irrecoverable debts?
The following accounting concepts are used when recording the provision for irrecoverable debts:
Concept | Reason |
|---|---|
Accruals | The likely expense of future irrecoverable debts is matched to the accounting period where the sales were made |
Prudence | The likely irrecoverable debts should be subtracted from the profit for the year and the trade receivables so that the profits and the assets are not overstated |
Worked Example
Clara starts trading on 1 January 2022. At 31 December 2022, the trade receivables balance is $24 000. Clara sets up a provision for irrecoverable debts which is to be maintained at 4% of trade receivables.
(a) Prepare an extract from the income statement for the year ended 31 December 2022 and an extract of the current assets section from the statement of financial position at 31 December 2022.
(b) At 31 December 2023, the trade receivables balance is $22 000. Prepare an extract from the income statement for the year ended 31 December 2023.
Answer
Part (a)
Calculate the provision for irrecoverable debts
4% ✕ $24 000 = $960
This is an increase from $0
It will appear as an expense on the income statement
Clara Income Statement (extract) for the year ended 31 December 2022 | |
$ | |
Expenses | |
Provision for irrecoverable debts | (960) |
Clara Statement of Financial Position (extract) at 31 December 2022 | ||
Current Assets | $ | $ |
Trade receivable | 24 000 | |
Provision for irrecoverable debts | (960) | 23 040 |
Part (b)
Calculate the new provision for irrecoverable debts
4% ✕ $22 000 = $880
Calculate the difference from the previous provision for irrecoverable debts
$960 - $880 = $80
This is a decrease
It will appear as other income on the income statement
Clara Income Statement (extract) for the year ended 31 December 2023 | |
$ | |
Other income | |
Provision for irrecoverable debts | 80 |
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