ExpertReceivables and Payables
Learning outcomes
- Identify and explain examples of receivables and payables
- Identify the benefits and costs of offering credit facilities
- Describe the purpose of an aged receivables analysis
- Describe the purpose of customer credit limits
- Prepare journal entries to write off an irrecoverable debt
- Prepare journal entries for a recovered irrecoverable debt
- Demonstrate the impact of irrecoverable debts on financial statements
- Prepare journal entries for allowance for irrecoverable debts
- Illustrate how to include movements in the allowance in financial statements
- Account for contras between receivables and payables
- Prepare and reconcile supplier statements
Objective A-D: Receivables, Payables, and Credit Management
Trade receivables are amounts owed to the business by customers for goods or services supplied on credit. Trade payables are amounts owed by the business to suppliers for goods or services received on credit.
Offering credit facilities to customers has both benefits and costs:
| Benefits | Costs |
|---|---|
| Attracts more customers | Risk of non-payment (bad debts) |
| Increases sales volume | Cash flow delays |
| Builds customer loyalty | Administrative costs of credit control |
| Competitive advantage | Financing costs (the business needs cash while waiting) |
An aged receivables analysis categorises outstanding receivables by how long they have been overdue (e.g., current, 30 days, 60 days, 90+ days). This helps identify slow-paying customers and potential bad debts.
Credit limits are maximum amounts that a customer is allowed to owe at any time. They help manage the risk of excessive exposure to any single customer.
Objective E-I: Irrecoverable Debts and Allowances
Writing Off Irrecoverable Debts
When a specific debt is known to be irrecoverable (e.g., the customer has gone bankrupt), it is written off:
Dr Irrecoverable Debts Expense (SPL) | Cr Trade Receivables
This removes the receivable from the SFP and recognises the loss as an expense.
Recovery of Previously Written-Off Debts
If a previously written-off debt is subsequently recovered:
Dr Cash | Cr Irrecoverable Debts Recovered (SPL income)
Allowance for Irrecoverable Debts
The allowance (also called provision) for irrecoverable debts is an estimate of the total receivables that may not be collected. It is a contra-asset that reduces the carrying amount of trade receivables in the SFP.
Creating or increasing the allowance:
Dr Irrecoverable Debts Expense (SPL) | Cr Allowance for Irrecoverable Debts
Decreasing the allowance:
Dr Allowance for Irrecoverable Debts | Cr Irrecoverable Debts Expense (SPL)
Important: Only the change (increase or decrease) in the allowance is charged to the SPL, not the total allowance.
Only the CHANGE Goes to the SPL
If the allowance was £5,000 last year and is £7,000 this year, only the increase of £2,000 is charged as an expense. If the allowance decreases from £7,000 to £4,000, the decrease of £3,000 is credited to the SPL (reducing the expense). The exam frequently tests this — don't charge the full allowance to the SPL.
The allowance for irrecoverable debts was £4,000 at the start of the year and needs to be £6,500 at the year-end. What amount is charged to the statement of profit or loss?
A previously written-off debt of £1,500 is unexpectedly recovered. What is the journal entry?
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ACCA FA — Financial Accounting Practice Exam 3
A complete mock exam replication for ACCA FA, mirroring live computer-based testing parameters. Covers double-entry accounting, ledger adjustments, group consolidations, and financial statement production. Features unique scenarios including heavy manufacturing, tech startups, NGOs, agriculture, service firms, public utilities, and cross-border multinationals.