Allowance for Impairment of Trade Receivables
In this lesson, we will learn how to write off trade receivables, calculate and account for the allowance for impairment of trade receivables and impairment loss on trade receivables, and record these transactions in the journal. We will also learn how to interpret the allowance for impairment and impairment loss accounts.
Related Lessons:
Calculating Allowance for Impairment of Trade Receivables
The allowance for impairment of trade receivables is an estimate of the amount of debts that may not be collected from credit customers. This possible loss is recorded as the impairment loss on trade receivables.
To calculate the allowance for impairment of trade receivables, we multiply the ending trade receivables amount with an estimated percentage expected to default.
Example:
Ending trade receivables is $40,000
Allowance for impairment of trade receivables is estimated at 5%
Allowance for impairment of trade receivables is 40,000 x 5% = $2,000
Recording in Journals & Accounts
The allowance for impairment of trade receivables is a contra asset account. This makes it a Credit account. Impairment loss on trade receivables is an expense, therefore a Debit account.
In the Statement of Financial Position, allowance for impairment of trade receivables is deducted from trade receivables to show their expected collectible value.
Example:
Trade receivables $40,000
Less allowance for impairment of trade receivables $2,000
Net trade receivables $38,000
Writing Off Trade Receivable
A business may choose to write off the debt of a trade receivable who is confirmed to be unable to repay its debts.
To write off the debt of a trade receivable:
Dr Allowance for impairment of trade receivables
Cr Trade receivables
Calculating Impairment Loss on Trade Receivable
Impairment loss on trade receivables is recorded to recognise the estimated amount of debts that may not be collected from credit customers.
To calculate impairment loss on trade receivables:
Current year allowance for impairment of trade receivables + Debt written off – allowance for impairment of trade receivables brought down
Example:
Allowance for impairment of trade receivables on 1 January 20X1: $1,500
Debts written off during the year: $800
Allowance for impairment of trade receivables on 31 December 20X1: $2,000
Impairment loss on trade receivables = 2,000 + 800 – 1,500 = $1,300
Impairment loss on trade receivables is recorded as follows:
Increase in impairment loss on trade receivables
Dr Impairment loss on trade receivables
Cr Allowance for impairment of trade receivables
Decrease in impairment loss on trade receivables
Dr Allowance for impairment of trade receivables
Cr Impairment loss on trade receivables
In the statement of financial performance:
Increase in impairment loss on trade receivables is recorded as an Expense
Decrease in impairment loss on trade receivables is recorded as Reversal of impairment loss on trade receivables, deducted from total expenses.