Create and adjust an allowance for irrecoverable debts
Estimate a prudent allowance from remaining receivables and record the change from the existing provision.
Section 4.4 · Irrecoverable debts and allowances
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What base is normally used for a percentage allowance after write-offs?
What you will learn
- Calculate an allowance as a percentage of receivables
- Record the creation of and adjustments to an allowance in journals and ledger accounts
- Trace the effect on expense, profit and receivables presentation
Calculate the required closing allowance
An allowance for irrecoverable debts estimates the part of remaining trade receivables that may not be collected. Write off confirmed debts first, then apply the stated percentage to the remaining receivables.
The required closing allowance is compared with the existing allowance. The difference—not the full new allowance—is the period's adjustment when an allowance already exists.
Record an increase or decrease in the allowance ledger
If the required allowance is higher, debit Irrecoverable debts expense and credit Allowance for irrecoverable debts for the increase. If it is lower, debit the allowance and credit the expense for the decrease.
In the allowance ledger, carry down the required closing balance. For example, an opening credit balance of $250 plus a $150 increase gives a $400 closing credit balance; a $380 opening balance reduced by $80 gives a $300 closing credit balance. Transfer only the change to the expense account.
Present receivables net of the allowance in the statement of financial position. The estimate reduces profit through expense, but it does not identify exactly which customer will fail to pay.
Pause and explain
Receivables after write-offs are $6,000. A 4% allowance is required; the current allowance is $180. How much is the increase?
Worked example
Receivables are $8,000 after write-offs. The required allowance is 5%, and the existing allowance is $250. Calculate the adjustment and ledger closing balance.
Show the worked solution
- Required allowance = 5% × 8,000 = $400.
- Increase needed = 400 − 250 = $150; debit Irrecoverable debts expense and credit the Allowance ledger by $150.
- The Allowance account carries down a $400 credit balance; only the $150 increase is charged to this period's expense.
Answer Increase the allowance by $150: Dr Irrecoverable debts expense; Cr Allowance for irrecoverable debts. Allowance ledger closing credit balance $400.
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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 $7,500. The required allowance is 4%; existing allowance is $250. Find the adjustment and net receivables.
Give me a hint
Calculate the new required balance, then subtract the existing allowance to find the change.
Compare my reasoning
- Required allowance = 7,500 × 4% = $300.
- Increase = 300 − 250 = $50.
- Net receivables = 7,500 − 300 = $7,200.
Increase allowance by $50; closing net receivables are $7,200.
Look for these in your work
- Allowance correct
- Adjustment correct
- Net balance correct
After writing off $500, receivables are $7,500. A 4% allowance is required; the existing allowance is $250. Give the journal entry and net receivables.
Give me a hint
The confirmed debt is removed first; the allowance percentage applies to the remaining balance.
Compare my reasoning
- Required allowance = 7,500 × 4% = $300.
- Increase needed = 300 − 250 = $50.
- Dr Irrecoverable debts expense $50; Cr Allowance $50; net receivables = 7,500 − 300 = $7,200.
Dr Irrecoverable debts expense $50; Cr Allowance $50. Net receivables are $7,200.
Look for these in your work
- Write-off sequence clear
- Journal amount correct
- Net presentation correct
Receivables after write-offs are $10,000; the required allowance is 3%, while the existing allowance is $380. Calculate the adjustment, ledger balance and profit effect.
Give me a hint
Compare the required closing allowance with the existing balance.
Compare my reasoning
- Required allowance = 10,000 × 3% = $300.
- Decrease = 380 − 300 = $80; debit the Allowance ledger and credit Irrecoverable debts expense $80.
- Carry down a $300 credit balance in Allowance. The $80 reduction credits this period's expense, so profit rises by $80 relative to the old estimate.
Reduce the allowance by $80: Dr Allowance; Cr Irrecoverable debts expense. The ledger closes with a $300 credit balance; profit increases by $80 relative to the prior allowance.
Look for these in your work
- Required balance correct
- Ledger adjustment correct
- Profit effect correct
Common mistakes
- Applying the percentage before confirmed debts are written off
- Charging the full new allowance when one already exists
- Treating the allowance as a specific customer's confirmed debt
What can you explain now?
Required allowance is $500; existing allowance is $420. What is the adjustment?
Compare with the explanation
Increase the allowance by $80
The adjustment is the difference between required and existing balances.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why is the allowance adjustment the difference from the existing balance, not the full required balance?
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.