What the allowance for doubtful debts is
Some debts may not be paid, but nobody knows yet. Work out a specific and a general allowance and set the allowance up.
Task 1Doubtful is not irrecoverable4 questions
A doubtful debt is one that may not be paid, but there is still a chance. It is not written off. It stays in trade receivables.
Instead, the business makes an allowance: an estimate of how much of its receivables may never be collected.
- Specific allowance
- an amount set against one named customer's debt
- General allowance
- a percentage of the remaining receivables, based on past experience
After the write-off, Calder Cycles has trade receivables of £24,800. Hill Street Bikes owes £800 of this and is struggling to pay, so a specific allowance is made for the whole of its debt. A general allowance of 2% is made on the rest.
Task 2Setting up the allowance4 questions