Calculate and adjust an allowance for irrecoverable debts
Estimate a closing allowance from receivables and adjust the existing balance by the change required for the current period.
Section 1.5 · Preparation of financial statements
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover objective 1.5.1 only: adjustments to draft financial statements. Sole traders (1.5.2), partnerships (1.5.3) and limited companies (1.5.4) remain to be mapped. Practice is self-checked, not an official Cambridge grade; the separately published 2029 syllabus, timed papers and human subject-teacher review remain outstanding.
Before you begin
- Use double-entry and accrual concepts from Topics 1.2 and 1.4. Each adjustment must update the correct statement-of-profit-or-loss and statement-of-financial-position accounts.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Is an allowance for irrecoverable debts a specific cash fund?
What you will learn
- Calculate a required closing allowance
- Find the increase or decrease from the existing allowance
- Record the profit and receivable effects
Calculate the closing amount on the correct base
An allowance for irrecoverable debts estimates the portion of remaining receivables that may not be collected. First write off specific debts that are already known to be irrecoverable, then apply the required percentage or method to the remaining receivables specified in the question.
The allowance is shown as a deduction from trade receivables in the statement of financial position. It is an estimate, not a named customer debt and not cash set aside in a bank account.
Adjust by the movement, not the entire closing balance
Compare the required closing allowance with the existing allowance. If the required amount is higher, increase the allowance and charge the increase as an expense. If it is lower, reduce the allowance and credit the decrease to profit or the expense account as required by the question.
A known irrecoverable debt is written off separately. Do not include it in the percentage base and also leave it in receivables, or the potential loss may be counted twice.
Pause and explain
Receivables are $10,000 after specific write-offs. A 4% allowance is required. What is the closing allowance?
Worked example
After a $400 write-off, remaining receivables are $12,000. The required allowance is 5%; the existing allowance is $450 credit. Calculate the closing allowance and adjustment.
Show the worked solution
- Required closing allowance = 12,000 × 5% = $600.
- Increase required = 600 − 450 = $150.
- Debit irrecoverable-debt expense $150 and credit the allowance $150; closing net receivables are 12,000 − 600 = $11,400.
Answer Closing allowance is $600. Increase it by $150: Dr Irrecoverable-debt expense $150; Cr Allowance $150. Net receivables are $11,400.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Receivables after write-offs are $18,000. The required allowance is 3%; the existing allowance is $700 credit. Find the adjustment and net receivables.
Give me a hint
Find the required closing allowance, then compare it with $700.
Compare my reasoning
- Required allowance = 18,000 × 3% = $540.
- Decrease = 700 − 540 = $160; debit the allowance and credit the expense or recovery presentation required.
- Net receivables = 18,000 − 540 = $17,460.
Reduce the allowance by $160. Closing net receivables are $17,460.
Look for these in your work
- Closing allowance correct
- Movement direction correct
- Net receivables correct
Receivables are $25,000 before a known $1,000 irrecoverable debt is written off. A 4% allowance is required on the remaining balance. The existing allowance is $800 credit. Calculate the closing allowance and movement.
Give me a hint
Remove the specific write-off first.
Compare my reasoning
- Remaining receivables = 25,000 − 1,000 = $24,000.
- Required allowance = 24,000 × 4% = $960.
- Increase = 960 − 800 = $160; net receivables = 24,000 − 960 = $23,040.
Write off $1,000, then increase the allowance by $160 to $960. Net receivables are $23,040.
Look for these in your work
- Specific debt removed
- Percentage base correct
- Movement and net amount correct
A business reports an allowance of $1,200 when the required closing allowance is $850 and the opening allowance is $700. Explain the current-period effect without charging $850 as a new expense.
Give me a hint
Use the change in the allowance from the existing balance.
Compare my reasoning
- The allowance must decrease from $1,200 to $850 by $350.
- The $350 decrease is credited to profit or reduces the debt expense, following the presentation requested.
- The year-end deduction from receivables is $850; it is not a new $850 expense.
Reduce the allowance by $350 and show the closing allowance of $850 against receivables. The current-period effect is the $350 decrease, not a fresh $850 charge.
Look for these in your work
- Movement used
- Profit effect direction correct
- Closing balance distinguished
Common mistakes
- Charging the entire closing allowance as a new expense when an allowance already exists
- Applying a percentage before removing debts already written off
- Treating the allowance as cash or a liability
What can you explain now?
Required allowance is $900 and the existing credit allowance is $700. What adjustment is needed?
Compare with the explanation
Increase the allowance by $200 and charge the expense
The statement already contains $700, so only the $200 movement is new.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the closing allowance formula and the rule for comparing it with an existing allowance.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.