A write-off removes a specific debt from receivables, while an allowance adjustment changes an estimate held in its own account. Do the write-off first, apply the policy to the remaining receivables, then record the change in the allowance.
You met each idea separately in recording an irrecoverable amount and calculating an allowance. This lesson shows the two working side by side inside receivables and allowances.
What makes them different?
A write-off is a fact about one customer. The business has decided that a named amount will not arrive, so the asset is removed.
An allowance is a judgement about the whole group of remaining customers. No customer account is touched. The allowance account holds the estimate, and it is deducted from receivables when the statement of financial position is prepared.
| Feature | Write-off | Allowance adjustment |
|---|---|---|
| What triggers it | A named debt will not be paid | A policy applied to remaining receivables |
| Customer account | Credited | Not changed |
| Account debited | Irrecoverable debts | Irrecoverable debts (increase) or Allowance (decrease) |
| Order | First | Second, on the remaining balance |
How to handle a question with both, step by step
- Underline each named debt that is to be written off and record it.
- Subtract the written-off debts from the receivables total.
- Apply the policy percentage to the remaining balance.
- Compare with the opening allowance and find the change.
- Add the expense from the write-off and the allowance increase (or subtract the decrease) to find the total irrecoverable debts charge in the income statement.
Worked example
Nadia Fabrics has trade receivables of RM31,500 before any adjustment. Raju Textiles, which owes RM900, has become insolvent.
The policy is an allowance of 3% of remaining receivables. The existing allowance is RM800.
Step 1: debit Irrecoverable debts RM900, credit Raju Textiles RM900.
Step 2: RM31,500 − RM900 = RM30,600.
Step 3: 3% of RM30,600 = RM918.
Step 4: RM918 − RM800 = RM118 increase. Debit Irrecoverable debts RM118, credit Allowance RM118.
Step 5: total charge to the income statement = RM900 + RM118 = RM1,018.
The receivables shown on the statement of financial position are RM30,600 less the allowance of RM918, which is RM29,682.
The mistake to watch for
A common error is to skip the write-off and adjust only the allowance, so the lost customer stays in the ledger.
Mistaken working: 3% of RM31,500 = RM945, increase RM145. Raju Textiles stays at RM900.
The student treated the customer’s lost debt as part of the estimate.
This leaves a customer who will never pay inside receivables, and the allowance, which should cover only uncertain balances, now does a job a write-off should do. The correct order is to remove RM900 from receivables first, then apply 3% to RM30,600. The expense changes too: RM1,018 instead of RM145.
Check yourself
1. Classify each as a write-off or an allowance adjustment: (a) A customer is declared insolvent and owes RM400. (b) 5% is applied to the closing receivables of RM20,000. (c) The allowance falls from RM600 to RM500.
Show answer
(a) Write-off. (b) Allowance adjustment. (c) Allowance adjustment, a decrease of RM100.
2. Receivables are RM20,000. RM500 is written off. The policy is 5% and the existing allowance is RM700. Find the allowance adjustment and the total charge to profit.
Show answer
Remaining receivables RM19,500. 5% = RM975. Increase RM975 − RM700 = RM275. Total charge RM500 + RM275 = RM775.
3. Which of the two adjustments changes the balance on a customer’s account?
Show answer
Only the write-off changes a customer’s account. The allowance adjustment changes the allowance account only.
Where this leads next
With both entries clear, learn how the result appears on a statement in showing a net receivables figure. The ledger trainer lets you test the debit and credit sides before you move on.
Our teachers can look at your own worked questions and find the exact point where the two adjustments begin to blur, through online one-to-one Accounting tuition.