Study Notes
Irrecoverable debts, also known as bad debts, are amounts owed by customers that a business believes will not be recovered and must be written off as an expense in the income statement. Recovery of debts occurs when a previously written-off debt is unexpectedly paid, recorded as income in the year it is received.
- Irrecoverable Debts — amounts owed by customers that are not expected to be recovered and are written off as an expense. Example: A customer goes bankrupt, and their $500 debt is written off, reducing profit.
- Recovery of Debts — when a previously written-off debt is paid, it is recorded as income. Example: A customer pays a debt previously written off, increasing profit.
- Provision for Doubtful Debts — an estimated amount set aside for receivables that may become irrecoverable. Example: A business sets a provision of 5% of receivables to anticipate potential losses.
Exam Tips
Key Definitions to Remember
- Irrecoverable Debts
- Recovery of Debts
- Provision for Doubtful Debts
Common Confusions
- Confusing irrecoverable debts with provisions for 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 debt recovery recorded? Debit Bank, Credit Irrecoverable Debts Recovered
- How do you calculate a new provision for doubtful debts? Calculate as a percentage of receivables, adjust for existing provision
What Examiners Usually Test
- Understanding of double entry for irrecoverable debts
- Ability to calculate and adjust provisions for doubtful debts
- Impact of debt recovery on financial statements