Study Notes
Irrecoverable debts are amounts owed by customers that are unlikely to be recovered and must be written off as an expense. Recovery of debts occurs when a previously written-off debt is unexpectedly paid, recorded as income. Provisions for doubtful debts are estimates set aside for potential future irrecoverable debts, applying the prudence principle.
- Irrecoverable Debts — debts that are not expected to be collected and are written off as an expense.
Example: A customer goes bankrupt and cannot pay a $500 debt, which is then written off. - Recovery of Debts — when a previously written-off debt is paid, it is recorded as income.
Example: A customer pays a debt that was written off last year, increasing current profit. - Provision for Doubtful Debts — an estimate of receivables that may become irrecoverable, reducing net receivables value.
Example: A business sets aside 5% of receivables as a provision for potential bad debts.
Exam Tips
Key Definitions to Remember
- Irrecoverable Debts
- Recovery of Debts
- Provision for Doubtful Debts
Common Confusions
- Confusing irrecoverable debts with doubtful debts
- Misunderstanding the impact of debt recovery on profit
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 recovery of a previously written-off debt recorded? Debit Bank, Credit Irrecoverable Debts Recovered
- How do you calculate the new provision for doubtful debts? Multiply receivables by the provision percentage and adjust for existing provision
What Examiners Usually Test
- Understanding of double entry for irrecoverable debts
- Calculation and adjustment of provisions for doubtful debts
- Impact of debt recovery on financial statements