Last reviewed: July 2026.
A doubtful-debt allowance estimates the part of trade receivables that may not be collected. Modern IFRS reporting uses an expected credit loss model, combining historical experience, current conditions, forecasts and customer-specific evidence.
From doubtful-debt provision to expected credit losses
Traditional bookkeeping often used a provision for doubtful debts based on a percentage of receivables. Under IFRS 9, impairment is forward-looking: entities recognise expected credit losses rather than waiting for a loss event. The older terminology remains common in education and small-business systems, but the calculation should reflect the applicable reporting framework.
An allowance reduces the carrying amount of trade receivables without removing individual customer balances. A write-off is different: it removes a receivable when there is no reasonable expectation of recovery.
Initial recognition of trade receivables
A credit sale normally creates revenue and a trade receivable. The receivable is initially measured under the relevant financial-instrument and revenue requirements. Sales taxes collected for authorities are not revenue and should be recorded separately.
Customer sub-ledger entries must reconcile to the trade receivables control account. Accurate ageing data is essential because impairment models rely on the timing and risk characteristics of outstanding balances.
Simplified expected credit loss approach
For trade receivables without a significant financing component, entities commonly apply the simplified approach and recognise lifetime expected credit losses. A practical provision matrix groups receivables by shared credit-risk characteristics and applies loss rates to ageing bands.
Historical default rates are a starting point, not the final answer. They are adjusted for current conditions and reasonable, supportable forecasts. Customer type, geography, product, collateral, disputes and economic outlook may justify separate groups.
Provision matrix example
| Ageing band | Receivables | Adjusted loss rate | Expected loss |
|---|---|---|---|
| Current | $100,000 | 0.5% | $500 |
| 1–30 days overdue | $40,000 | 2% | $800 |
| 31–90 days overdue | $20,000 | 8% | $1,600 |
| More than 90 days overdue | $10,000 | 30% | $3,000 |
| Total | $170,000 | — | $5,900 |
The required closing allowance is $5,900. If the existing allowance is $4,300, the period’s impairment expense is $1,600. If the existing allowance exceeds the new estimate, the excess is reversed, subject to the reporting framework.
Journal entries
- To increase the allowance: debit impairment loss and credit loss allowance.
- To reduce an excessive allowance: debit loss allowance and credit impairment gain or expense reversal.
- To write off a specific balance: debit loss allowance and credit trade receivables.
- To record a later recovery: recognise cash and a recovery in accordance with the entity’s policy.
The write-off entry should not create a second expense if the loss was already provided through the allowance. Clear documentation links the customer decision to the accounting entry.
Specific customer information
A matrix does not replace individual assessment where specific information is available. Bankruptcy, serious disputes, repeated broken promises, loss of a major contract or adverse legal action may require a customer-specific loss estimate. Conversely, strong collateral or credit insurance may reduce expected loss if enforceable and appropriately considered.
Credit-control staff often hold information not visible in the ledger. Finance should incorporate collection notes, legal correspondence and post-reporting-date receipts into the estimate.
Forward-looking adjustments
Economic forecasts can affect default probabilities and recovery rates. Management may adjust historical loss rates for unemployment, interest rates, sector stress, commodity prices or other factors linked to customer performance. The relationship should be supportable rather than arbitrary.
Use scenario-weighted information where uncertainty is material. Governance should challenge overlays, back-test prior estimates and prevent unsupported management bias.
Presentation and disclosure
Trade receivables are presented net of the loss allowance. Notes may explain the impairment method, assumptions, credit-risk concentrations and movement in the allowance. Material judgments and estimation uncertainty should be clear.
Reconcile opening allowance, new losses, reversals, write-offs, recoveries and other movements. The reconciliation should agree to the general ledger and financial statements.
Credit-control and accounting controls
- Approve customer credit limits and review them periodically.
- Produce reliable ageing reports and investigate unapplied cash.
- Reconcile the receivables ledger to the general ledger.
- Escalate overdue balances and record collection evidence.
- Approve write-offs independently of sales staff.
- Back-test loss rates against actual defaults and recoveries.
Impairment accounting works best when integrated with operational credit management. Poor master data or unallocated receipts can materially distort the estimate.
Common errors
Common mistakes include applying one percentage to all customers, ignoring current economic conditions, netting credit balances incorrectly, double-counting specific losses and matrix losses, and treating a write-off as proof that revenue was never valid.
Another error is using the tax deduction as the financial-reporting estimate. Tax rules and accounting impairment requirements may differ and should be reconciled separately.
Back-testing and governance
Back-test the loss rates at least annually by comparing earlier estimates with actual cash collections, write-offs and recoveries. Large differences may reveal weak customer grouping, poor ageing data or overlays that are too optimistic or too severe. Document every change in methodology, assumptions and source data so reviewers can reproduce the calculation.
Assign clear ownership across credit control, finance and management. Credit control supplies current customer evidence, finance maintains the model and reconciliations, and management challenges significant judgements. This governance turns the allowance from a spreadsheet exercise into a reliable financial reporting control.
Related accounting guides
- Bad Debts and Expected Credit Losses under IFRS 9
- Accounting Entries for Bad Debts Write-Off
- Purpose of Control Accounts: Reconciliation Guide
Related Accounting Support guides
Authoritative references
Practical takeaway
Maintain accurate ageing data, group customers by meaningful risk characteristics, calculate lifetime expected losses, overlay specific evidence and reconcile the allowance movement. Distinguish clearly between estimating an allowance and writing off a receivable.