Accruals, Prepayments and Irrecoverable Debts
Accounts must reflect what a period actually cost or earned — not simply the cash that happened to move during it. That’s the matching concept in action, and it’s also why some customer debts eventually have to be written off.
1. Accruals and Prepayments
| Term | Meaning | Effect |
|---|---|---|
| Accrued expense | Incurred but not yet paid | Add to expense; show as a current liability |
| Prepaid expense | Paid in advance, relates to next period | Deduct from expense; show as a current asset |
| Accrued income | Earned but not yet received | Add to income; show as a current asset |
| Prepaid (deferred) income | Received in advance, relates to next period | Deduct from income; show as a current liability |
6,000 − 500 = $5,500 (the $500 is shown separately as a prepayment, a current asset)
12,000 + 300 = $12,300 (the $300 is shown separately as an accrual, a current liability)
2. Irrecoverable Debts and Allowances
An irrecoverable debt is a specific customer debt written off as uncollectable (Debit Irrecoverable Debts expense, Credit Trade Receivables). An allowance for irrecoverable debts is a general estimate for debts that might not be collected in future — it reduces trade receivables in the statement of financial position without removing any specific customer’s balance.
10,000 × 5% = $500 (Debit Irrecoverable Debts expense $500, Credit Allowance for Irrecoverable Debts $500)
Debit Cash $200, Credit Irrecoverable Debts Recovered (income) $200 — the recovery is treated as income, since the debt had already been removed from the accounts when it was written off.
- Mixing up accrued expense (add) and prepaid expense (deduct) — always ask: does this belong to THIS period or another one?
- Forgetting that only an INCREASE in the allowance for irrecoverable debts is charged as an expense — a decrease is treated as income (it reduces the expense, or is shown as a credit).
- Writing off an irrecoverable debt by adjusting the allowance instead — these are two separate things: specific debts are written off directly, while the allowance is a general provision.
Key Vocabulary Recap
Syllabus Reference
Practice questions
Accruals, Prepayments and Irrecoverable Debts — Practice
Covers: accrued/prepaid expenses and income, irrecoverable debts, and allowances. 10 questions.
Define an accrued expense.
Define a prepaid expense.
Rent of $6,000 was paid during the year, of which $500 relates to next year. Calculate the rent expense for the statement of profit or loss, and state how the $500 is shown in the statement of financial position.
Wages of $12,000 were paid during the year, and a further $300 was owing at the year end. Calculate the wages expense for the statement of profit or loss, and state how the $300 is shown in the statement of financial position.
Explain the difference between accrued income and prepaid (deferred) income.
Explain what is meant by an irrecoverable debt, and give the double entry to write one off.
Trade receivables total $10,000 at the year end. Calculate a 5% allowance for irrecoverable debts.
Explain the difference between an irrecoverable debt and an allowance for irrecoverable debts.
Explain how an increase in the allowance for irrecoverable debts affects the statement of profit or loss.
A debt of $200, previously written off as irrecoverable, is unexpectedly recovered. Give the double entry to record this.
Worked solutions
Show worked solutions
Accruals, Prepayments and Irrecoverable Debts — Practice: Solutions
Define an accrued expense.
Define a prepaid expense.
Rent $6,000 paid, $500 prepaid.
Wages $12,000 paid, $300 accrued.
Accrued income vs prepaid income.
Explain irrecoverable debt; double entry.
5% allowance on $10,000 receivables.
Irrecoverable debt vs allowance.
Effect of increasing the allowance.
Debt of $200 recovered. Double entry.
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