Allowance for Expected Credit Losses

Allowance for Expected Credit Losses is a contra account inside Trade and other receivables that holds the company's estimate of customer dues it expects never to collect. NFRS 9 asks for the estimate up front, based on how old each balance is and past experience, rather than waiting until a debt is clearly dead. It carries a credit balance, so Debtors less this allowance is the collectable figure on the Balance Sheet. The year-end Journal Entry debits Impairment Losses and credits here; when a specific debt is finally given up, the allowance is debited and Debtors credited with the customer as party. The IRD allows the deduction only on actual write-off, which creates a deferred tax asset.

Allowance = Sum over ageing buckets of (Balance in bucket x Expected loss rate for that bucket).

1. 01Open Financial Reports > Accounts Receivable at Ashadh end and read the ageing columns.
2. 02Apply an expected loss rate to each bucket, for example 50 percent over 180 days, and total the allowance.
3. 03Go to Invoicing > Journal Entry > New dated Ashadh end; debit Impairment Losses, credit this account for the change needed.
4. 04Submit. The entry above posts for dues over 180 days old.
5. 05To write off a dead debt later, debit this account and credit Debtors with the customer as party.

Post by Journal Entry at year end based on how old each customer balance is. The other side is Write Off or Impairment Losses.

Dr Impairment Losses Rs 15,000, Cr Allowance for Expected Credit Losses Rs 15,000 for dues over 180 days old at Ashadh end.