Final answer:
The irrecoverable debts expense for Rossi in the statement of profit or loss is £1,300. This is calculated by reversing £1,200 from the initial expense (£2,500) to adjust for the desired allowance for receivables of £2,500 for the period.
Step-by-step explanation:
The question revolves around calculating the irrecoverable debt expense for the statement of profit or loss. Hence, we need to adjust the existing allowance for receivables and consider the new allowance the company wishes to carry forward. Initially, Rossi had an allowance for receivables of £3,700 as of 1 August 20X5. By the end of 30 July 20X6, they wish to have an allowance of £2,500. The difference (£1,200) is the amount that needs to be reversed from the allowance.
The irrecoverable debts expense reported will reflect the actual losses on receivables that Rossi has deemed irrecoverable, which in this case will be the balance of the original expense (£2,500) plus any reversals required to reach the new allowance figure. As no additional bad debts have been written off directly through the profit or loss account, the irrecoverable debt expense equals the initial expense minus the reversal, which is £2,500 - £1,200 = £1,300 for the period.