Trade receivables and doubtful debts in the statements
How a preparer assesses trade receivables that may not be collected in a small client's statements, from the age analysis to the allowance and the note.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Most small clients believe every customer will pay in the end. The age analysis usually says otherwise. Between the owner's optimism and the ledger's numbers sits one of the year-end judgements a preparer has to get right: how much of trade receivables is really collectable, and how that shows in the statements.
This article covers starting from the age analysis, specific and grouped allowances, writing debts off properly, the year-end entry and what the note and policy should say.
Starting from the age analysis
The age analysis is the backbone of the assessment. Where a client keeps its receivables on Achekam, they are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals.
Read it with the client, not just from it. For each significant balance in the older columns, ask:
- Has the customer paid anything since year end?
- Is there a dispute, a credit note pending or a payment plan?
- Is the customer still trading, or is there any sign of business rescue, liquidation or sequestration?
- Is this really a receivable, or an old error, an unallocated receipt or a duplicate invoice?
Receipts after year end are the best evidence of recoverability. Ask for them, with the answers above, as a request through Achekam's RFI console, so the evidence sits with the engagement rather than in someone's inbox.
Specific doubtful accounts and a general allowance
The impairment model depends on the framework.
- IFRS for SMEs recognises an impairment loss when there is objective evidence that a receivable is impaired, such as significant financial difficulty of the debtor, a breach of contract or the likelihood of bankruptcy. Balances can be assessed one by one or grouped with others of similar credit risk.
- Full IFRS, under IFRS 9, uses expected credit losses. For trade receivables that usually means the simplified approach, measuring lifetime expected losses from the start, often with a provision matrix built from historical loss rates adjusted for current conditions.
For a typical small client on IFRS for SMEs, the work has two parts. Specific accounts: balances where something has already happened, such as a liquidation, a dispute or long silence, are assessed individually. Grouped balances: the rest can be assessed as a group where evidence shows losses have been incurred, for example when a class of customers is in trouble. A blanket percentage applied to every balance without such evidence is not an incurred-loss allowance.
The ACCA's article on trade receivables and revenue explains how credit sales create trade receivables and how to account for irrecoverable debts and an allowance for receivables, a clear refresher for staff doing this work for the first time.
Writing off a debt in the client's books, with approval
An allowance reduces the carrying amount; a write-off removes the debt. Write off only when there is no realistic prospect of recovery, and keep the evidence: a liquidator's letter, a court outcome, a decision to stop pursuing the customer.
On a client's Achekam books, an unpaid debt can be written off once a partner approves, and an administrator can void an issued invoice that has no payments or credits, which reverses its journal. Use the right tool. A void is for an invoice that should never have been issued; a write-off is for a genuine sale that will not be paid. Mixing them up distorts revenue.
Writing a debt off in the books does not settle the VAT position by itself. Each country has its own rules for adjusting output tax on irrecoverable debts, so check them before the client claims anything back.
The year-end adjusting entry for the allowance
Where the client's ledger does not yet reflect the allowance, post it at year end. In Achekam's Studio, staff can post a year-end adjusting entry, and a wrong one is reversed with who and why, never deleted.
A worked example in words: the age analysis shows a balance from a customer that went into liquidation after year end, with problems that began months before it. The liquidator expects to pay creditors little, if anything. The preparer recognises an allowance for the full balance, less any amount the liquidator has indicated, debiting impairment losses and crediting the allowance. The liquidation is an adjusting event because the debtor's difficulties existed at year end.
Decide whether the allowance should also go into the client's own ledger so next year opens from the right place. Adjusting entries made only in the Studio are not carried forward when the set is rolled forward to the next year. Year-end adjusting entries covers that choice.
What the note and policy should say
The Studio's policies include standard wording based on IFRS for SMEs, labelled for review before issue, and the notes take their figures from the mapped trial balance. Check that:
- the policy describes the impairment model the client actually applies;
- the receivables note shows the gross amount, the allowance and the net carrying amount, and the movement in the allowance where significant;
- the impairment loss can be seen in the income statement or the notes;
- related-party receivables are shown separately, which a custom statement line can do while still totalling into the standard receivables line.
Facts the trial balance cannot supply, such as the nature of a significant dispute, are left as "[to be completed]".
Good credit control during the year makes the year-end work far lighter, because disputes are raised and settled while the facts are fresh; it is covered in client credit control.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
