ICAEW AF · Chapter 10 · Question 7 of 9
Why does a business make an allowance for receivables, rather than waiting until specific debts are known to be irrecoverable?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) So that receivables are not overstated and the expected credit loss is recognised in the period in which the related revenue arises
Explanation
An allowance reflects the expectation that some receivables will not be collected, so that the asset is shown at the amount expected to be recovered. Under IFRS 9, losses are recognised on an expected credit loss basis, which matches the cost of bad debts to the period in which the sales were made. The allowance is a book entry only: it does not set aside cash, and customers remain legally liable.
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