Irrecoverable Debts (Edexcel IGCSE Accounting)

Adjustments for Provisions for Irrecoverable Debts

Spec point — IGCSE_ACCOUNTING:S5.182

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:

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

Final answer: Clara Final answer: Income Statement (extract) for the year ended 31 December 2022
	Final answer: $
Final answer: Expenses
Final answer: Provision for irrecoverable debts	Final answer: (960)

Final answer: Clara Final answer: Statement of Financial Position (extract) at 31 December 2022
Final answer: Current Assets	Final answer: $**	Final answer: **$
Final answer: Trade receivable	Final answer: 24 000
Final answer: Provision for irrecoverable debts	Final answer: (960)	Final answer: 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

Final answer: Clara Final answer: Income Statement (extract) for the year ended 31 December 2023
	Final answer: $
Final answer: Other income
Final answer: Provision for irrecoverable debts	Final answer: 80