Allowance for impairment loss on Trade Receivable is a contra asset account. A contra asset account is the ‘Opposite’ of an asset account. Do not take it as a liability. Rather, take it as a negative in the asset section of the balance sheet.
Think of allowance for impairment loss on Trade receivable as a buffer account. A ‘Just in case’ account for any trade receivable that might not be able to pay you up anymore. The account is set up so that in case, the trade receivable can’t pay you, take from this account to close the trade receivable. Deduct from allowance for impairment loss on trade receivable. Use it to deduct the trade receivable, in order to remove the trade receivable.
The double entry to write off the trade receivable is
DR Allowance for impairment loss on Trade Receivable
CR Trade Receivable.
The concept for allowance for impairment loss on trade receivable falls back on ‘Prudence Concept’. If you want to know more about prudence concept, read up on my blog ‘Prudence concept and what it actually mean‘. Simply put, it is to set aside the possible loss which the company might suffer due to trade receivable not paying up.
If you want to know the techniques to learn for learning Principles of Accounts (POA), read up Learning Principles of Accounts (POA) and Scoring As.
Felix Lim is the coach for Principles of Accounts (POA) Tuition class in Edulight Learning Hub. Experience in the line of coach Principles of Accounts (POA) for over 10 years, he understood well how students learn through the wrong methods. He seeks to correct the wrong methods of learning in Principles of Accounts (POA) and advocate “Understanding not Memorizing” in his teachings.
You can visit Edulight Learning Hub to understand more about him and his tuition sessions.