Summary
Irrecoverable debts are amounts owed by customers that are not expected to be recovered and must be written off as an expense. Provision for doubtful debts is an estimate set aside for receivables that may become irrecoverable, applying the prudence principle to show realistic receivables value.
- Irrecoverable Debts — debts that will not be recovered and are written off as an expense.
Example: A customer goes bankrupt, and their $500 debt is written off. - Recovery of Debts — when a previously written-off debt is unexpectedly paid, recorded as income.
Example: A customer pays a debt that was written off last year. - Provision for Doubtful Debts — an estimated amount for potential irrecoverable debts, reducing receivables value.
Example: 5% of receivables are set aside as a provision.
Exam Tips
Key Definitions to Remember
- Irrecoverable Debts: Debts that are not expected to be recovered.
- Provision for Doubtful Debts: An estimate for potential future irrecoverable debts.
Common Confusions
- Confusing irrecoverable debts with doubtful debts.
- Thinking a recovery reverses the original write-off.
Typical Exam Questions
- What is the accounting entry for writing off an irrecoverable debt?
Debit Irrecoverable Debts Expense, Credit Sales Ledger Control - How is a provision for doubtful debts created?
Debit Provision for Doubtful Debts Expense, Credit Provision for Doubtful Debts - What happens when a debt previously written off is recovered?
It is recorded as income.
What Examiners Usually Test
- Understanding of double entry for irrecoverable debts.
- Calculation and adjustment of provision for doubtful debts.