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Irrecoverable Debts and Provision For Doubtful Debts

An irrecoverable debt, also known as a bad or doubtful debt, is one that will not be paid by the customer. When it becomes clear a debt is irrecoverable, an entry is made to write off the debt by debiting the irrecoverable debts account and crediting the customer's account. At year-end, the balance in the irrecoverable debts account is transferred to the income statement as an expense. Sometimes only part of a debt is irrecoverable, in which case the cash received is debited along with the irrecoverable debts account.

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175 views17 pages

Irrecoverable Debts and Provision For Doubtful Debts

An irrecoverable debt, also known as a bad or doubtful debt, is one that will not be paid by the customer. When it becomes clear a debt is irrecoverable, an entry is made to write off the debt by debiting the irrecoverable debts account and crediting the customer's account. At year-end, the balance in the irrecoverable debts account is transferred to the income statement as an expense. Sometimes only part of a debt is irrecoverable, in which case the cash received is debited along with the irrecoverable debts account.

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IRRECOVERABLE DEBTS AND

PROVISION FOR DOUBTFUL


DEBTS.
Lesson objectives

• Understand the meaning of irrecoverable debts and


recovery of debts written off.
• Prepare ledger accounts and journal entries to record
irrecoverable debts.
Irrecoverable debts

• What are trade receivables?

• These are businesses or individuals who have received goods or


service from another business on credit.
What is an irrecoverable debt?
May be referred to as a bad debt or doubtful debt.
An irrecoverable debt is one that is not going to be paid.
Why would a customer not pay?

• The debtor may have died.


• Moved away and not left the money for payment.
• The business has failed and the debtor cannot afford to
pay.
Irrecoverable debt recovered.
• A debt expected to be uncollectable is written of as an
irrecoverable debt.
• However, a debtor may at some later date pay all or some of the
debt.
• This is known as an irrecoverable debt recovered.
Recording irrecoverable debts
• When a credit sale is made, it is recorded as a debit in a customer’s account in
the sales ledger.
• When it is clear that the debt is not going to be paid by the customer and is
irrecoverable, the debt has to be written off.
• The general journal entry required to record this is:
• Debit: irrecoverable debts account with the amount owed.
• Credit: the debtor’s account with the amount owed.
• The customer’s account is now closed.
Example
• Samuel is owed $1200 by H. Ardup and $850 by Tony Broke. Both of these
debtors have become bankrupt on 1 November 2010 and are unable to pay
their debts. Samuel writes the debts off as bad.
• Journal entries:
• At the end of the year, the balance on the irrecoverable debts account is
transferred to the income statement as an expense, reducing profits.
• The general journal entry is:
• Debit: income statement with the total of the irrecoverable debts account.
• Credit: the irrecoverable debts account with the total.
The irrecoverable debts account is now closed.
• Sometimes part of an outstanding debt is paid and the remainder
is written off as an irrecoverable debt.

• For example, if a business ceases trading and the owner sells the
firm’s assets at some later date to pay off part of the debts to its
trade payables.
• The general journal entry necessary to write off a debt that is partially repaid
is as follows:
• Debit: cash if cash is received, or
• Debit: bank if cheque was received
and
• Debit: irrecoverable debts with unpaid portion
• Credit: the debtor/customer with the full amount outstanding.

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