Trade receivables

 Trade receivables are customers who bought goods on credit from the firm.  

So when goods are sold on credit, we will need to create a Trade receviable account.

The double entry will be

Dr Trade receivable and Cr Sales revenue

When the credit customer made payment by cheque, the double entry will be

Dr Cash at bank and Cr Trade receivable

This will be the ideal situation.

However, sometimes credit customers may not be able to make payment due to non accounting factors like economic downtown or even case like COVID 19 which may impact on their business tremendiously.

When trade receivable facing difficulty in payment, there are always sign to show that,

1. cheque dishonoured

2 no response to call or text or email

3 debt long overdue.

So those debts that cannot be collected will need to be written off as impairment loss on Trade receviable.

We should recognised it as uncollectibe and most business will first make provision for this loss ie Allowance for impairment on Trade receivable.

The accounting theory for this is Prudence theory, we do not overstate profit or assets and understate losses or liabilities.

Creation of Allowance for Impairment onTrade receivable

At the end of the year ending 31 December 2017, Melvin had the trade receivabe as follow:

Trade receivable = $40000

The business decided to make an allowance for the impairment on Trade receivable based  on 5% of its Trade receivable.

Allowance for impairment for trade receivable = 5% x 40000= $2000

Double entry for the creation at 31 December 2017:

Dr Impairment loss on Trade receivable $2000

Cr Allowance for impairment loss on Trade receivable $2000

Increase in Allowance for impairment on Trade receivable

At 31 December 2018, Melvin trade receivable and allowance for impairment on trade receviable figure is as follow:

Trade receivable $45000

Allowance for impairment on Trade receivable $2000

he business decided to mantain the allowance for the impairment on Trade receivable as  5% on its Trade receivable.

Allowance for impairment for trade receivable = 5% x 45000= $2250

So, the allowance increase by $250.

The business already provided $2000 last year, so this year, they only need an additonal $250 in the allowance account.

So, the double entry for the increase at 31 December 2018 will be :

Dr Impairment loss on Trade receivable $250

Cr Allowance for impairment on Trade receivable $250

Decrease in Allowance for impairment on Trade receivable

At 31 December 2019, Melvin trade receivable and allowance for impairment on trade receviable figure is as follow:

Trade receivable $25000

Allowance for impairment on Trade receivable $2250

The business will still mantain the allowance for the impairment on Trade receivable as  5% on its Trade receivable.

Allowance for impairment for trade receivable = 5% x 25000= $1250

So, the allowance decrease by $2250-$1250=$1000.

The business already provided $2250 last year, so this year, they only need $1250 in the allowance account, so there is a decrease of $1000

So, the double entry for the increase at 31 December 2019 will be :

Dr Allowance for Impairment  on Trade receivable $1000

Cr Impairment loss on Trade receivable $1000

So, a decrease in allowance for impairment on Trade receivable means that the business will not need to provide so much maybe due to lesser trade receivables or more  trade receivables are able to pay back promptly.

Practise question, please click here POA practise question

In some condition, 1 or 2 trade receivables may gone bankrupt during the year.  So, here will be an example of how to handle situation when this happen.

Example.

At the end of  31 December 2019, Melvin trade receivable and allowance for impairment on trade receviable figure is as follow:

Trade receivable $35000

Allowance for impairment on Trade receivable $1250

The business will still mantain the allowance for the impairment on Trade receivable as  5% on its Trade receivable.

During the year 2019, one of Melvin's Trade receivable- Kelly who owed $900 gone bankrupt and not able to pay a single cent.  

How to treat this scenario?

Since Melvin firm's already had an allowance for impairment account, we will write off the amount Trade receivable-Kelly owed by debiting the allowance for impairment account and crediting Trade receivable- Kelly account.

Dr Allowance for impairment for Trade Receivable : Kelly $900 

Cr Trade receivable : Kelly $900

By so doing, allowance for impairment now wll have 1250-900 = $350 in the balance column.

We will now need to check how much is this year's allowance for impairment to be put in the balance column.

       5% x [35000]= $1750

So, we will use 1750 - 350 ( new balance after deducting the bankrupt amount) =$1400

To do the double entry for the allowance end of 2019:

Dr Impairment loss on Trade receivable $1400

 Cr  Allowance for impairment on Trade receivable $1400

If you put it in account form, it will look like this : 

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