I have this question in my Financial accounting practice book and I think there is an incorrect answer. Could you please have a look and see what result you come to.
At January 20X1, there was an allowance for receivables of $3000. During the year, $1000 of debts were written off as irrecoverable and $800 of debts previously written off were recovered. At 31 December 20X1, it was decided to adjust the allowance for receivables to 5% of receivables which are $20000.
What is the total receivables expense of the year?
ok, lets take this from the top. I'm going to do this step by step the long way rather than just skipping to the answer.
remember that the provision through the P&L is the adjustment for this year, not the total amount of provision as last years provision will have already gone through to the balance sheet.
Debts written off mean that the provision was correct.
Debts recovered mean that the provision was unnecessary
In the question you have an provision of $3000 last year and the provision for this year has been reestimated to $1000 (5% of $20,0000) so on the face of matters giving us a credit of $2000 for the provision for the P&L to adjust the provision back.
$1000 became real so is no longer a provision. $800 was recovered meaning the the provision was $800 more than should have been allocated in the previous year.
So, the $3000 for the previous year should actually have been $3000 less $1000 which became real rather than a provision so reducing the provision to $2000.
The provision for 20x2 as shown above should be $1000 but there is already a provision of $2000 meaning that we need to credit the provision account through the P&L by $1000 which will bring the figure buried in retained profit/loss in the balance sheet back in line.
The final icing on the cake is that $800 that was previously deemed bad debt was recovered so we need to credit the provision account by this adjustment of $800 making the provision for bad debt through the P&L for this year a credit of $1800.
I could have gone for showing this through T accounts but I think (could be wrong) that the above explanation works better,
hope it helps,
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
