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Lisa has a brought forward balance on her allowance for receivables of £12,000 from 20X6. At the end of 20X7 her receivables balance stands at £240,000. She wants to write off £20,000 at the end of the year and have an allowance for receivables against Gill's full balance of £6,000. How much will be charged for the year to the statement of profit or loss from the irrecoverable debts expense account?

User Benry
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Final answer:

The irrecoverable debts expense for Lisa, which will be charged to the profit or loss statement, calculates to £14,000. This figure is derived from the £20,000 write-off and the adjustment in the allowance for receivables, which changes from £12,000 to £6,000 due to the new allowance for Gill's full balance of £6,000.

Step-by-step explanation:

To calculate the irrecoverable debts expense for the year to the statement of profit or loss for Lisa, we need to consider the write-offs and the changes in allowance for receivables. Lisa has a brought forward balance on her allowance for receivables from the previous year (20X6) of £12,000. At the end of the current year (20X7), she decides to write off £20,000 and wants to set up an allowance for receivables against Gill's balance of £6,000.

The initial £12,000 allowance is assumed to cover any potential unrecoverable receivables from the balance brought forward to the current year. When Lisa writes off £20,000, this is recognized as an expense directly in the profit or loss statement since it represents a definitive loss. Additionally, she needs to establish a new allowance for receivables. With Gill’s balance being £6,000, and assuming she wants to reserve 100% of Gill's balance due to anticipated non-payment, the total new allowance for receivables at the end of 20X7 would be £6,000.

To calculate the total charge for irrecoverable debts for the year, subtract the initial allowance (£12,000) from the combined effect of the write-off (£20,000 write-off + £6,000 new allowance), which results in an overall increase in the allowance for irrecoverable debts. The total charge for the year would therefore be the write-off (£20,000) plus the change in the allowance for receivables (£6,000 - £12,000), totalling £14,000 charged to the profit or loss statement for irrecoverable debts.

User Frops
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