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CHAPTER 8 –
LECTURE NOTES –
Irrecoverable debts
And allowances
Topic list

1. Irrecoverable debts
2. Allowances for receivables
3. Accounting for irrecoverable debts and receivables allowances
4. Adjusting the trial balance for irrecoverable debts and allowance for
receivables

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Trade receivable

Receivable is a balance owing to the business

Trade receivable is a balance arising in the course of normal trading operations,
when a customer buys goods without paying cash for them straight away and who
therefore owes money to the business.
Non trade receivable arise from many different types of transaction, depending
on the type of business, for example there may be loans to employees for season
travel tickets (internal-employee receivable).
Trade receivables = Accounts receivables + Note receivables + other
receivables

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Overview receivables
Uncollectible AR

Allowance method Direct write off

 2 stages: method

1. Estimates Non-GAAP
2. Use allowances
allowance at the (no standard
for AR
end of period guidance)

% of AR (aging
% of Sales
AR)

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Accounting treatment
CHAPTER 8: ACCOUNTING FOR RECEIVABLES

THE CONTENT: Trade receivables includes:

1/How many types of receivables? AR
Notes Receivables (Promissory note): Hua phieu: it's a kind of payment
Other receivables: Rent receivables, Insurance Receivables, Interest receivables

2/When TR appear? -----> when making credit sales Dr TR

Cr Sales
If nothing wrong happens, customers pay in full: Dr Cash
Cr TR
If something wrong happens, and the customers cannot pay in full ( maybe they go bankruptcy, they're dead)
Then, the company have to change AR into Uncollectible AR = Doubtful Accounts
The question of this chapter is: How to account for Uncollectible AR or Doubtful accounts?
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Accounting treatment
2 METHODS TO SOLVE
DIRECT WRITE OFF
At the date when the customer cannot pay in full, the company book:
Dr Irrecoverable debt expenses (bad debt ex)
Cr AR/TR

This method is simple, but we cannot use it in the accounting standards

If cash received later on:

Dr Cash at bank
Cr Irrecoverable debt ex

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 ALLOWANCE METHODS
I make some guarantees for myself, b/c I guess that u cannot pay in full.
Sorry, I cannt wait until u say sorry, I take care for myself first.
At the end of each period, I guess the % of uncollectible and booking Bad debt expense first.
Dec-31 Dr Irrecoverable debt expenses (bad debt ex) X
Cr Allowance for receivables X
The next question is how much is X?
Allowances for receivables: contra-asset account
- Contra-asset of trade receivables
2 METHODS FOR COMPUTING X

% OF SALES AGING OF RECEIVABLES

Estimates 2% OF SALES is uncollectible, SALES IS $100,000 For Example:
My company divide AR into 4 groups
Dec-31 Dr Irrecoverable debt expenses (bad debt ex) 2.000 Group 1: $30,000 over due 30 days
Cr Allowance for receivables 2.000 Group 2: $60,000 over due 60 days
Group 3: $90,000 over due 90 days
Group 4: $10,000 not yet overdue
The policy is: if overdue =<30 days: 5% of uncollectible
If 30 days < ovedue < =60 days: 10% uncollectible
If 60 days < ovedue <= 90 days: 20% uncollectible
If not overdue: 2% of uncolectibles
Calculate bad debt ex base on Aging of AR and book entry?
Bad debt = 5% x 30.000 + 10% x 60.000 + 20% x 90.000 + 2% x 10.000 = 25.700
Dec 31, Dr Irrecoverable debt expenses (bad debt ex) 25.700

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Cr Allowance for receivables 25.700
 What's next? ----> we use the allowance

How?
Jan 31, the customer calls and say oh so sorry, I went bankruptcy, and I cant pay in full
Jan-31 Dr Allowance for doubtful account
Cr AR

How can we present the TR and Allowance for doubtful account in SFP?--> Contra - TR (negative figures)

Increase an allowance:
Dr Irrecoverable debt expenses (bad debt ex)
Cr Allowance for receivables

Decrease an allowance:
Dr Allowance for receivables
Cr Irrecoverable debt expenses (bad debt ex)
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Requirements for Receivables presentation on FSs

JARGON:
1. Irrecoverable debts =
uncollectible items = bad
debts
2. Allowances for receivables
= Allowances for
irrecoverable debts =
Allowances for
uncollectible items
(Allowances are not
Provisions (IAS 37))

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LET’S SEE WHICH ACCOUNTING STANDARDS
REGULATE RECEIVABLES?

 IAS 32
 IFRS 9
 IFRS 7
 IFRS 15
 IFRS 16
…………

RECEIVABLES ACTUALLY PRIMARY FINANCIAL INSTRUMENTS

(FINANCIAL ASSETS)
 LEARN MORE TO UNDERSTAND IN DEPTH!
LET’S SEE HOW THEY DO IN PRACTICE
LET’S SEE HOW THEY DO IN PRACTICE
LET’S SEE HOW THEY DO IN PRACTICE
LET’S SEE HOW THEY DO IN PRACTICE
- AGING ANALYSIS

Conclusion:
Different companies, different aging analysis rate (different % of bad debt estimates toward TR)
Current VAS – Circular 48/2019/TT-BTC
2. Mức trích lập:
a) Đối với nợ phải thu quá hạn thanh toán, mức trích lập dự phòng như sau:
- 30% giá trị đối với khoản nợ phải thu quá hạn từ 6 tháng đến dưới 1 năm.
- 50% giá trị đối với khoản nợ phải thu quá hạn từ 1 năm đến dưới 2 năm.
Fixed rates for all
- 70% giá trị đối với khoản nợ phải thu quá hạn từ 2 năm đến dưới 3 năm.
- 100% giá trị đối với khoản nợ phải thu từ 3 năm trở lên.
b) Đối với doanh nghiệp kinh doanh dịch vụ viễn thông và doanh nghiệp kinh doanh bán lẻ hàng
hóa, khoản nợ phải thu cước dịch vụ viễn thông, công nghệ thông tin, truyền hình trả sau và khoản nợ
phải thu do bán lẻ hàng hóa theo hình thức trả chậm/trả góp của các đối tượng nợ là cá nhân đã quá hạn
thanh toán mức trích lập dự phòng như sau:
- 30% giá trị đối với khoản nợ phải thu quá hạn từ 3 tháng đến dưới 6 tháng.
- 50% giá trị đối với khoản nợ phải thu quá hạn từ 6 tháng đến dưới 9 tháng.
- 70% giá trị đối với khoản nợ phải thu quá hạn từ 9 tháng đến dưới 12 tháng.
- 100% giá trị đối với khoản nợ phải thu từ 12 tháng trở lên.
Example 1: Use allowance for AR
Musicland has $50,000 in accounts receivable and a $200 credit balance in
Allowance for Doubtful Accounts on December 31, 2015. Past experience
suggests that 5% of receivables are uncollectible.

Desired balance in Allowance for

Doubtful Accounts.
$ 50,000
× 5.00%
= $ 2,500

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Example 2

Account for irrecoverable debts and allowance for receivables for this business?
Note: this example and this textbook also show combination of recognizing
methods (both direct write off and allowances are used)

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Guidance

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Example 3

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Example 3

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Guidance

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Example 4

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Guidance

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Example 5

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Guidance

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Solution

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Solution

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Example 6

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Guidance

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SCE
Opening capital:
Add:
+ Net profit (SCI)
+ Additional investments:
Less: Drawings SFP
Ending capital: NCA
CA
Total assests
Equity
NCL
CL
Total E & L 31
Homework

Self test textbook chap 8

Testbank chap 8

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