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Irrecoverable debts in the financial statements
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At the year end, irrecoverable debts are written off and the provision is adjusted. Both affect profit and the statement of financial position.
The steps
1. Write off any irrecoverable debts from trade receivables: an expense in the income statement.
2. Calculate the new provision, usually a percentage of the remaining trade receivables.
3. Compare with the old provision: an increase is an expense; a decrease is added to profit (as income or as a reduction of expenses).
2. Calculate the new provision, usually a percentage of the remaining trade receivables.
3. Compare with the old provision: an increase is an expense; a decrease is added to profit (as income or as a reduction of expenses).
In the statement of financial position
Trade receivables (after write-offs)
less provision for irrecoverable debts
= net trade receivables, shown under current assets.
less provision for irrecoverable debts
= net trade receivables, shown under current assets.
Worked numbers
Trade receivables are £20 000 after write-offs. The provision is to be 5%. The old provision was £1200. What appears in the income statement?
- New provision = 5% × 20 000 = £1000
- Change = 1000 − 1200 = −£200, a decrease
Answer: A decrease of £200, which increases profit
Write off irrecoverable debts first, then calculate the new provision on the remaining receivables. The change in provision goes to the income statement. Net receivables = receivables − provision in the statement of financial position.
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