Financial Accounting: From Double Entry to Expected Credit Loss
The reporting cycle
Every transaction hits two accounts (debit and credit), flows through books of prime entry into the ledger, is tested by a trial balance, adjusted for accruals, prepayments, depreciation, inventory and provisions, and finally presented as a statement of profit or loss and statement of financial position. Know the qualitative characteristics (relevance, faithful representation) and the conventions: going concern, accruals (matching), prudence, consistency, business entity.
Credit-relevant accounting
Receivables are shown net of allowances. Under IFRS 9 the impairment model is forward-looking: a 12-month expected credit loss for performing accounts, lifetime ECL once credit risk has increased significantly, and interest revenue on the gross carrying amount until the asset becomes credit-impaired. Trade receivables without a significant financing component often use the simplified lifetime-loss matrix.
Traps
- Capital versus revenue expenditure - capitalising repairs, or expensing a machine, distorts profit and assets.
- Depreciation is an allocation, not a cash flow, and never a cash fund for replacement.
- Confusing discount allowed (a selling expense) with discount received (income).
- Forgetting that a provision movement is the charge, not the closing balance.
- Errors of principle versus commission versus omission in suspense-account questions.
Worked example: allowance for receivables
Receivables 500,000; write off 20,000 as irrecoverable; general allowance 5%; opening allowance 20,000. Revised book = 480,000 → required allowance = 24,000. Charge to profit or loss = bad debt 20,000 + increase in allowance 4,000 = 24,000.