Financial Accounting · Receivables and payables

Allowance for Receivables Calculation and Adjustment for ACCA

Updated 11 October 2026 · Fact-checked

An allowance for receivables reduces trade receivables to the amount you expect to collect. Calculate the required closing allowance (specific plus general), compare it with the opening allowance, and charge or credit only the difference to profit or loss. The statement of financial position shows receivables less the allowance.

Understand Allowance for Receivables

Some customers will not pay. Under the prudence and accruals ideas, you should not show receivables at more than you expect to collect, and you should record the expected loss in the same period as the sale. The allowance does this.

An irrecoverable debt is a debt you are sure will not be paid. You write it off completely. An allowance is different. It covers debts that are doubtful but not yet written off. The customer still owes the money, so the receivable stays in the ledger. The allowance is a separate credit balance set against receivables.

A specific allowance is made for named debts you judge doubtful, for example a customer in financial difficulty. A general allowance is a percentage applied to the remaining receivables, based on past experience. To avoid double counting, apply the general percentage only to receivables after deducting irrecoverable debts written off and the debts covered by specific allowances.

The allowance is a running balance. Each year you work out what it should be at the year end. You then adjust it by the difference. An increase is an extra expense in profit or loss. A decrease is a reduction in expenses (a credit). You never charge the whole closing allowance each year, only the movement.

In the statement of financial position, show trade receivables at gross, deduct the allowance, and present the net figure in current assets. IFRS 9 uses an expected credit loss approach, but at Applied Knowledge level the question simply tells you the percentages or the doubtful debts.

Key formulas to remember

Receivables for general allowance: Gross receivables − irrecoverable debts written off − receivables with specific allowances; Do the write-offs first. The general percentage applies only to what is left.
Required closing allowance: Specific allowance + (general % × remaining receivables); This is the balance you want in the allowance account at the year end.
Profit or loss charge: Required closing allowance − opening allowance; Positive result: increase in allowance, an expense. Negative result: decrease, a credit to profit or loss.
Net receivables: Gross receivables (after write-offs) − closing allowance; This is the figure shown in current assets.
Journal for an increase: Dr Irrecoverable debts expense (allowance adjustment); Cr Allowance for receivables; Reverse the entries for a decrease.

How to solve Allowance for Receivables questions

Follow the same order every time. It stops double counting and wrong signs.

1Start with the gross trade receivables balance from the ledger or trial balance.
2Deduct any irrecoverable debts that must be written off now, and record the write-off as an expense.
3Identify specific doubtful debts. Work out the specific allowance, either the full amount or the stated percentage.
4Deduct the specific debts from the receivables left, then apply the general percentage to that figure.
5Add the specific and general allowances to get the required closing allowance.
6Compare with the opening allowance. Charge the increase or credit the decrease to profit or loss.
7Show receivables less the closing allowance in the statement of financial position, and the movement in profit or loss.

Quickest way: The four-line allowance check

When to use it: Use this for any number-entry or multiple-choice question that asks for the profit or loss charge or the net receivables figure.

Line 1: gross receivables minus write-offs.
Line 2: minus specific debts, then multiply the rest by the general %.
Line 3: add specific allowance to general allowance to get the closing allowance.
Line 4: closing minus opening. Positive is an expense, negative is a credit. Net receivables is line 1 minus line 3.
If write-offs are included in the question, remember the total expense is write-offs plus the allowance movement.

Common mistakes in Allowance for Receivables

Applying the general percentage to all receivables, including the specifically doubtful debts.
Students forget the debt is already covered by a specific allowance.
Fix: Subtract specific debts (and write-offs) before applying the general percentage.
Charging the full closing allowance to profit or loss.
The allowance is treated like a normal expense for the year.
Fix: Charge only the difference between closing and opening allowance.
Treating a decrease in the allowance as an expense.
Students remember that the allowance is an expense and ignore the direction.
Fix: If closing is lower than opening, the movement is a credit that reduces expenses.
Calculating the general allowance before deducting irrecoverable debts being written off.
Students use the trial balance figure without reading the adjustments.
Fix: Always read the notes first and write off before calculating any allowance.
Removing the allowance from the receivables ledger account.
Students confuse an allowance with a write-off.
Fix: Keep the receivable in the ledger. The allowance is a separate account shown as a deduction.
Using the specific allowance as the debt amount when the question gives a percentage.
Students rush and skip the percentage.
Fix: Check whether the specific allowance is full or a stated percentage of the debt.

Worked examples

Example 1

At 31 December, trade receivables are $80,000. Of this, $2,000 is to be written off as irrecoverable and a specific allowance of $3,000 is required against another customer's debt of $3,000. A general allowance of 5% is required on the remaining receivables. The opening allowance was $4,000. What is the total charge to profit or loss for the year in respect of receivables, and the net receivables figure?

Show the solution

Receivables after write-off: $80,000 − $2,000 = $78,000.
Remaining for general allowance: $78,000 − $3,000 = $75,000.
General allowance: 5% × $75,000 = $3,750.
Required closing allowance: $3,000 + $3,750 = $6,750.
Movement: $6,750 − $4,000 = $2,750 increase, an expense.
Total charge: write-off $2,000 + movement $2,750 = $4,750.
Net receivables: $78,000 − $6,750 = $71,250.

Answer: Profit or loss charge $4,750; net receivables $71,250.

Example 2

A business has trade receivables of $60,000 at the year end after all write-offs. It has a specific allowance of $1,500 for a debt of $1,500 and a general allowance of 2% on the other receivables. The opening allowance was $5,000. What is the effect on profit or loss and the receivables figure in the statement of financial position?

Show the solution

Remaining for general allowance: $60,000 − $1,500 = $58,500.
General allowance: 2% × $58,500 = $1,170.
Required closing allowance: $1,500 + $1,170 = $2,670.
Movement: $2,670 − $5,000 = −$2,330, a decrease.
A decrease is a credit to profit or loss, which increases profit by $2,330.
Net receivables: $60,000 − $2,670 = $57,330.

Answer: Profit increases by $2,330 (credit to profit or loss); net receivables are $57,330.

Exam tips

Read the question for write-offs first. They change the base for the general percentage.
Check the direction of the movement. Decide increase or decrease before choosing your answer option.
In multiple-choice questions, wrong options are often the full closing allowance or a figure with the general percentage on gross receivables. Calculate before looking at the options.
For number entry, check whether the question wants the movement, the total expense including write-offs, or the net receivables.
Write the four lines of working on your scratch pad every time. It takes under a minute.

Practice questions from Receivables and payables

Allowance for Receivables: frequently asked questions

What is the difference between a specific and a general allowance?

A specific allowance covers named debts you think are doubtful. A general allowance is a percentage applied to the other receivables, based on past experience. Together they make up the total allowance.

Is an allowance for receivables the same as writing off a debt?

No. A write-off removes the debt from receivables because it is irrecoverable. An allowance keeps the debt in the ledger but reduces the receivables figure in the statement of financial position.

How do I adjust the allowance for doubtful debts each year?

Calculate the required closing allowance, then compare it with the opening balance. Charge the increase to profit or loss, or credit the decrease. Only the movement goes through profit or loss.

Where does the allowance appear in the financial statements?

In the statement of profit or loss, the movement is shown within expenses. In the statement of financial position, the allowance is deducted from trade receivables to give the net figure in current assets.