An allowance for irrecoverable debts is an estimate: apply the stated percentage to the receivables that remain, then record only the change from last year’s allowance. An increase is an expense and a decrease is a gain to profit.
Questions on this skill appear whenever year-end adjustments follow a receivables ledger and a policy sentence such as “5% of trade receivables”. The percentage-base explorer helps you practise choosing the base before you take the percentage.
What is the allowance, and why is it a separate account?
A write-off deals with a debt that is already lost. An allowance deals with the chance that some other debts may not be paid. It is a prudent estimate, so the business shows lower profit now rather than a surprise later.
The allowance has its own account with a credit balance. The receivables total is not changed by it, so the customers’ accounts stay intact.
How to calculate and record it, step by step
- Start with the receivables balance at the end of the period.
- Remove any write-offs that are being recorded at the same time.
- Apply the stated percentage to what is left. This is the new allowance.
- Compare it with the existing allowance (the opening credit balance).
- Record the difference. If the new allowance is higher, debit the expense and credit the allowance. If it is lower, debit the allowance and credit the expense.
Worked example
Bukit Kayu Furniture has trade receivables of RM24,000 at 31 December 2025. A customer owing RM1,000 is declared bankrupt and is written off.
The policy says the allowance is 5% of the remaining receivables. There was no allowance before.
Step 1 and 2: RM24,000 − RM1,000 = RM23,000.
Step 3: 5% of RM23,000 = RM1,150.
Step 4: the existing allowance is nil.
Step 5: an increase of RM1,150. Debit Irrecoverable debts (allowance adjustment) RM1,150 and credit Allowance for irrecoverable debts RM1,150.
On 31 December 2026, receivables are RM18,400 and the same 5% applies, with no new write-offs.
Steps 1 to 3: 5% of RM18,400 = RM920.
Step 4: the existing allowance is RM1,150.
Step 5: RM1,150 − RM920 = RM230 decrease. Debit Allowance for irrecoverable debts RM230 and credit Irrecoverable debts RM230.
| Allowance for irrecoverable debts | RM | RM | |
|---|---|---|---|
| 1 Jan 2026 Balance b/d | 1,150 | ||
| 31 Dec 2026 Irrecoverable debts | 230 | ||
| 31 Dec 2026 Balance c/d | 920 | ||
| 1,150 | 1,150 |
The closing balance of RM920 matches the 5% calculation. That agreement is the check.
The mistake to watch for
The usual mistake is to record the whole new allowance every year, instead of the movement.
Mistaken entry for 2026: debit Irrecoverable debts RM920, credit Allowance RM920
The student treated RM920 as the amount to charge, which would leave the allowance at RM2,070.
The allowance account would show RM1,150 + RM920 = RM2,070, far above the RM920 the policy requires. The correct approach is to find the target balance first and then record the difference. The other common slip is to take 5% of RM24,000, which gives RM1,200, before the write-off is removed.
Check yourself
1. Receivables are RM15,000, the policy is 4%, and there is no existing allowance. What is the charge to profit?
Show answer
4% of RM15,000 = RM600. With no existing allowance, the charge is RM600.
2. The same business has an existing allowance of RM450 and the same receivables and 4% policy. What entry is needed?
Show answer
New allowance RM600, existing RM450, so an increase of RM150. Debit Irrecoverable debts RM150 and credit Allowance RM150.
3. After a write-off, receivables are RM9,000. The policy is 10% and the existing allowance is RM1,100. What is the adjustment?
Show answer
10% of RM9,000 = RM900. RM1,100 − RM900 = RM200 decrease. Debit Allowance RM200 and credit Irrecoverable debts RM200, which adds RM200 to profit.
Where this leads next
Next, separate the two ideas clearly in allowance adjustment versus write-off. Keep the double-entry rules close by using the ledger trainer when you check your debits and credits.
If percentages and ledger movements tend to blur together, online one-to-one Accounting tuition gives you a teacher who can slow the steps down on your own working.