Key Concepts
The allowance account normally carries a credit balance, so reading its entries means knowing what each side represents.
Every transaction is recorded in two accounts — that is double entry. To interpret an account, check two things for each entry: whether it is a debit or a credit in this account, and the Particulars column, which names the other account in the entry. Together they tell you what the entry was for.
| Entry side | What it means |
|---|---|
| Debit | The allowance decreases — a debt written off against the allowance, or a year-end reduction (reversal) |
| Credit | The allowance increases — a year-end increase recorded as an impairment loss |
Read the Particulars column — it names the other account. That tells you the real transaction (e.g. "Trade receivables — [Name]" = a write-off; "Impairment loss on trade receivables" = a year-end adjustment). A debit decreases the allowance; a credit increases it.
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X6 | ||||
| 1 Jan | Balance b/d | 5,700 Cr | ||
| 4 May | Trade receivables — Deepa | 5,000 | 700 Cr | |
| 31 Dec | Impairment loss on trade receivables | 9,300 | 10,000 Cr | |
| 20X7 | ||||
| 1 Jan | Balance b/d | 10,000 Cr | ||
| 31 Dec | Impairment loss on trade receivables | 3,900 | 6,100 Cr | |
| 20X8 | ||||
| 1 Jan | Balance b/d | 6,100 Cr |
- 4 May 20X6: Saffron Trading wrote off $5,000 of debt owed by the credit customer Deepa, as it was confirmed uncollectible.
- 31 December 20X7: Saffron Trading reviewed its trade receivables and decreased the allowance for impairment of trade receivables from $10,000 to $6,100 (a $3,900 reduction).
The trade receivables balance at 31 December 20X7 is $50,000.
Statement of Financial Position as at 31 December 20X7 (extract)
| $ | $ | |
|---|---|---|
| Current assets | ||
| Trade receivables | 50,000 | |
| Less: Allowance for impairment of trade receivables | (6,100) | 43,900 |
Because the allowance decreased by $3,900, current assets increase by $3,900 — a smaller allowance means a higher net trade receivables figure. The decrease is recorded as a reversal of impairment loss, which reduces this expense by $3,900. Since profit = income − expenses, a lower expense means profit for the year also increases by $3,900.
A Note on the Impairment Loss on Trade Receivables Account
You may occasionally be asked to read the Impairment loss on trade receivables account itself. Unlike the allowance, this is an expense account (normally a debit balance). At each year end the change in the allowance is posted here, then the account is closed to the Income summary — so it does not carry a balance into the next year.
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X6 | ||||
| 31 Dec | Allowance for impairment of trade receivables | 9,300 | 9,300 Dr | |
| 31 Dec | Income summary | 9,300 | 0 |
- The debit of $9,300 (particulars: Allowance for impairment of trade receivables) is the year-end increase in the allowance, recorded as the expense for the year.
- The second entry transfers the expense to the Income summary at year end (closing the account), which carries it into the Statement of Financial Performance and leaves a nil balance.
In a year when the allowance decreases, this account is credited instead (a reversal), and the closing entry transfers it out as a reduction in expenses.
Reading the credit balance as a debit. The allowance is a contra-asset with a credit balance. A credit entry increases it; a debit entry decreases it — the opposite of a normal asset.
Calling a debit entry an "increase". In this account a debit reduces the allowance — it is either a write-off or a year-end reversal (decrease in allowance), never an increase.
Using the wrong trade receivables figure in the extract. Use the trade receivables balance after any write-offs, then deduct the closing allowance.