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The allowance for irrecoverable debts Cambridge IGCSE Accounting revision

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In plain words

At the year end, a business cannot tell which of its customers will fail to pay next year. But experience says some will. So it makes an estimate, and takes it off the trade receivables now.

In papers set up to 2026 this was called the provision for doubtful debts. It is the same thing.

6 things to know

  1. An allowance for irrecoverable debts is an estimate of the amount of trade receivables that may not be paid. No particular customer's account is changed.
  2. It applies prudence: assets and profit are not overstated. It also applies matching: the likely loss is charged in the same year as the sales that caused it.
  3. It is usually a percentage of trade receivables, worked out after irrecoverable debts have been written off.
  4. When an allowance is created, the whole amount is an expense: debit the statement of profit or loss, credit the allowance account.
  5. After that, only the change is entered each year. An increase is an expense. A decrease is added to income.
  6. In the statement of financial position, the allowance is deducted from trade receivables.

Worked example

A business keeps an allowance of 5% of trade receivables. Trade receivables are $40 000 at the end of year 1, $46 000 at the end of year 2 and $38 000 at the end of year 3. Find the entry in the statement of profit or loss each year.

  1. Year 1: 5% of 40 000 = $2000. The allowance is new, so the expense is $2000.
  2. Year 2: 5% of 46 000 = $2300. The allowance rises by 300, so the expense is $300.
  3. Year 3: 5% of 38 000 = $1900. The allowance falls by 400, so $400 is added to income.

Tips and tricks

  • Only the change goes in the statement of profit or loss. The full allowance goes in the statement of financial position.
  • Write off any irrecoverable debts first, then take the percentage of what is left.
5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

The allowance for irrecoverable debts: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

  1. What is an allowance for irrecoverable debts?
    • a list of customers who have not paid
    • an estimate of the trade receivables that may not be paid (the answer)
    • a discount for paying early
    • the total written off in the year

    It is an estimate, not a write-off.

  2. Trade receivables are $30 000 and the allowance is 3%. What is the allowance?
    • $300
    • $900 (the answer)
    • $3000
    • $9000

    3% of 30 000.

  3. The allowance rises from $800 to $1100. What is the entry in the statement of profit or loss?
    • income of $300
    • an expense of $300 (the answer)
    • an expense of $1100
    • income of $1100

    Only the increase is charged.

  4. The allowance falls from $2000 to $1700. How is this treated?
    • an expense of $300
    • income of $300 (the answer)
    • an expense of $1700
    • no entry

    The decrease is added to income.

  5. Trade receivables are $20 000 and the allowance is $600. What figure is included in current assets?
    • $20 600
    • $20 000
    • $19 400 (the answer)
    • $600

    The allowance is deducted from trade receivables.

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