Receivables control account - Bad debts and dishonoured item...

Learning Outcomes

After reading this article, you will be able to explain how the receivables control account records sales, receipts, returns, dishonoured cheques, and bad debts. You will define key terms such as irrecoverable and doubtful debts, record the write-off and recovery of bad debts, and understand the impact on the trial balance. You will know the correct journal entries for each scenario and avoid common errors tested in the ACCA FA1 exam.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how receivables are managed in the accounts, including how to deal with amounts unlikely to be collected and errors relating to customer receipts. In particular, you should cover:

• The structure and purpose of the receivables control account
• How to record credit sales, receipts from customers, and sales returns
• The treatment and double entry for irrecoverable (bad) debts
• Dealing with dishonoured cheques and their reversal in the accounts
• Making journal entries for the write-off and recovery of bad debts
• The effect of these transactions on the trial balance and financial statements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which double entry is required when a specific trade receivable is judged to be irrecoverable?
   1. Debit Receivables, Credit Sales
   2. Debit Receivables, Credit Irrecoverable Debts
   3. Debit Irrecoverable Debts, Credit Receivables
   4. Debit Sales, Credit Receivables
2. What does it mean if a customer’s cheque is ‘dishonoured’?
   1. The cheque is received late
   2. The cheque is lost in the post
   3. The bank refuses to pay the cheque
   4. The customer overpays by cheque

3. True or False? The write-off of an irrecoverable debt affects both the profit for the year and the balance of receivables shown in the statement of financial position.

4. Explain how the recovery of a previously written-off debt is recorded in the accounts.

Introduction

All businesses that sell on credit must manage the risk of non-payment. The receivables control account brings together transactions with customers—recording credit sales, receipts, returns, dishonoured payments, and adjustments for amounts not expected to be collected. Efficient handling of bad debts and dishonoured cheques is essential for presenting an accurate picture of receivables in the accounts and the profit or loss for the period. It is also a frequently examined area in ACCA FA1.

Key Term: receivables control account
An account in the general ledger summarising all transactions with credit customers, including credit sales, receipts, sales returns, bad debts, and adjustments for reversal items.

Recording Entries in the Receivables Control Account

The receivables control account is updated for all movements relating to credit customers:

• Increase for new credit sales
• Decrease for cash received from customers
• Decrease for sales returns
• Decrease for bad debts written off
• Increase for dishonoured (bounced) cheques
• Adjustments for recovered debts

Key Term: bad debt (irrecoverable debt)
A receivable that is no longer expected to be collected, written off as an expense in the accounts.

Key Term: dishonoured cheque
A cheque from a customer which the bank refuses to pay, requiring reversal of the receipt in the accounts.

Worked Example 1.1

A business has an opening receivables balance of $5,000. During the month, it makes credit sales of $3,500, receives $2,800 from customers, records $200 in sales returns, writes off $300 as a bad debt, and has a cheque for $600 from a customer which is later dishonoured by the bank.

What is the closing receivables balance, and how are these transactions recorded?

Answer:
Opening balance: $5,000

• Credit sales: +$3,500
  – Receipts: –$2,800
  – Sales returns: –$200
  – Bad debt: –$300
• Dishonoured cheque: +$600
  Closing balance: $5,800

The dishonoured cheque is first recorded as a receipt (decreasing receivables), but when dishonoured, the same amount is added back (increasing receivables). Bad debts are written off by debiting Irrecoverable Debts expense and crediting Receivables.

Bad Debts and Their Write-off

Sometimes, an amount owed by a customer cannot be recovered (e.g. the customer goes bankrupt). This amount should be removed from receivables and recognised as an expense.

• Debit: Irrecoverable Debts (expense account in SPL)
• Credit: Receivables (control account in SFP)

Key Term: irrecoverable debts expense
The account used to record amounts written off as uncollectible, showing as an expense in the statement of profit or loss.

Worked Example 1.2

Premier Traders is owed $900 by B. Carter. Carter is declared bankrupt and will not pay. Which journal entry records this?

Answer:
Debit Irrecoverable Debts $900 (SPL)
Credit Receivables $900 (SFP)
This reduces the amount owed by customers and records the loss as an expense.

Exam Warning

A common mistake is to debit the Receivables account again for an already written-off debt, which would increase, rather than remove, the debt. Always credit Receivables to eliminate the uncollectible amount.

Dishonoured Cheques

A cheque from a customer may later be refused by the bank—for example, due to insufficient funds. If this happens, the receipt previously credited to Receivables must be reversed.

• Debit: Receivables (to reinstate the amount due)
• Credit: Bank

The customer again owes the amount to the business.

Worked Example 1.3

A cheque for $400 is received from M. Singh and banked, reducing their receivables balance. The cheque is later dishonoured.

What adjustment is required?

Answer:
When the cheque was received:
Debit Bank $400
Credit Receivables $400

When dishonoured:
Debit Receivables $400
Credit Bank $400

This reinstates the receivable balance for M. Singh.

Recovery of Previously Written-off Debts

If a customer who was previously considered irrecoverable later pays, this must be recorded as income for the current period.

There are two methods seen in practice. The most direct is:

• Debit: Bank
• Credit: Irrecoverable Debts (reduces current year’s expense)

This approach leaves the original Receivables written-off unaffected and recognises the income in the period when it is received.

Worked Example 1.4

Last year, Sandal Ltd wrote off $250 owed by L. Green as irrecoverable. This year, L. Green unexpectedly pays the full balance.

How is this recorded?

Answer:
Debit Bank $250
Credit Irrecoverable Debts $250
This reverses part of the current year’s expense in the statement of profit or loss.

Summary

Accurate handling of bad debts and dishonoured cheques is required for correct financial reporting. Writing off irrecoverable debts reduces both profit and receivables. Dishonoured receipts are added back to the receivables control account. Recovered bad debts are credited against current year’s irrecoverable debts expense. These adjustments are frequently tested in ACCA FA1 and are essential for maintaining correct control account balances.

Key Point Checklist

This article has covered the following key knowledge points:

• The function of the receivables control account
• Double entry for bad debts and their effect on accounts
• Recognition and reversal of dishonoured cheques in the ledger
• Correct treatment of recovered debts
• Impact on profit and financial position
• Common errors and how to avoid them

Key Terms and Concepts

• receivables control account
• bad debt (irrecoverable debt)
• dishonoured cheque
• irrecoverable debts expense