Allowance for receivables

In this lesson

1. 0:00 Allowance for receivables explained
2. 1:23 Journal entry for creating allowance
3. 2:31 Adjusting existing allowance movements
4. 3:33 Worked example: Amsterdam allowance calculation
5. 5:27 Step-by-step process with irrecoverable debts
6. 6:40 Worked example: Tilburg combined figure calculation

About this lesson

You'll discover why entities create allowances, how they're calculated using a fixed percentage of receivables, and the crucial distinction between the allowance account and trade receivables on the statement of financial position. The lesson walks you through the journal entries for both creating an initial allowance and adjusting it in subsequent years, showing how movements in the allowance impact the statement of profit and loss. The video covers a practical step-by-step process for handling situations where both irrecoverable debts and allowances exist. You'll learn why irrecoverable debts must be written off first, then the allowance recalculated on the adjusted receivables balance. The lesson includes worked examples that show how to determine whether the allowance needs increasing or decreasing, and crucially, how to calculate the combined expense or gain that appears in the financial statements—a common exam question. By the end, you'll be confident handling allowance calculations in exam questions, understanding the mechanics of the double entry, and recognising how changes to the allowance affect reported profit.

Duration: 9m