Irrecoverable debts

Step 1 — Identify specific bad debts and write off:

• Dr Irrecoverable Debts £X
• Cr Customer Account £X
• This REMOVES the customer's debt from Trade Receivables and recognises the loss.

Step 2 — Recalculate the required Provision for Doubtful Debts:

• Required Provision = Trade Receivables (AFTER write-offs) × Policy %
• Use the REDUCED TR figure; otherwise you're providing for amounts already written off.

Step 3 — Adjust the existing provision:

• Adjustment = Required − Existing.
• Positive (increase) → expense (Dr Irrecoverable Debts; Cr Provision).
• Negative (decrease) → income (Dr Provision; Cr Reduction in Provision).

Step 4 — Record any recoveries:

• Reinstate the customer's account (Dr Customer; Cr Irrecoverable Debts Recovered).
• Record the cash receipt (Dr Bank; Cr Customer).

Write-offs: confirmed specific loss → recognise immediately (prudence).

Provision for Doubtful Debts: general expectation of future losses → anticipate them (prudence).

Recovery: only recognise when CASH ARRIVES (realisation concept). Don't recognise hopes of recovery.

Asymmetric treatment: prudence is conservative — recognise losses early, gains late. This is the philosophy behind the entire irrecoverable-debts treatment.

Formula: $\text{Required Provision} = (\text{Trade Receivables} - \text{Specific Write-Offs}) \times \text{Policy \%}$

Why AFTER write-offs: the written-off amounts are no longer in TR, so applying the % to pre-write-off TR would double-count the loss.

Adjustment: $\text{Adjustment} = \text{Required Provision} - \text{Existing Provision}$

• Positive: increase → IS expense.
• Negative: decrease → IS income.

The full provision balance sits on the SOFP cumulatively — only the year's CHANGE hits the IS.

Standard format:

Provision is a contra-asset — it reduces Trade Receivables. It is NOT a liability and NOT a separate line.

Net Trade Receivables is the figure that flows into Total Current Assets and gets factored into liquidity ratios.

Step 1 — Reinstate the customer's account:

• Dr Customer (Sales Ledger) £X
• Cr Irrecoverable Debts Recovered (income) £X

Step 2 — Record the cash receipt:

• Dr Bank £X
• Cr Customer (Sales Ledger) £X

Net effect on customer's account: opens at zero (debt was written off in prior year), is debited £X, credited £X, closes at zero.

IS effect: Irrecoverable Debts Recovered (other income) £X → profit ↑ £X.

SOFP effect: Bank ↑ £X; Capital ↑ £X (via increased profit).

Note: the reinstate-then-receive method is preferred for audit trail. A direct 'Dr Bank, Cr Income' shortcut is acceptable in some mark schemes.

Order: ALWAYS write off FIRST, then calculate provision on the reduced figure. This sequence appears in nearly every Edexcel mark scheme.

Concept naming: every entry can be justified by prudence (or realisation for recoveries). Naming the concept earns AO2 application marks.

Audit trail: use the two-step recovery method (reinstate + receive). It earns a presentation mark.

Two effects per adjustment: every year-end adjustment changes BOTH the IS AND the SOFP. State both.

SOFP placement: provision is a CONTRA-ASSET, not a liability. Show as a deduction from TR.

Change only: only the CHANGE in provision hits the IS each year — not the full provision.