prepare ledger accounts and journal entries to record recovery of debts written off
4.4 Irrecoverable Debts and Provision for Doubtful Debts
What are Irrecoverable Debts?
Imagine you lend your friend a book, but they never return it. In accounting, that book is like an irrecoverable debt – money that you can’t get back. When a debt is truly irrecoverable, we write it off as a loss.
Provision for Doubtful Debts
Before a debt actually becomes irrecoverable, we estimate how many might not be paid. This estimate is called the provision for doubtful debts and is a precautionary expense.
- It helps keep your financial statements realistic.
- It is created by adjusting the Allowance for Doubtful Debts account.
Journal Entries
-
Recording the Provision:
Debit: Bad Debt Expense $1,200
Credit: Allowance for Doubtful Debts $1,200
Explanation: We estimate that $1,200 of receivables might not be collected.
-
Writing Off a Specific Debt:
Debit: Allowance for Doubtful Debts $300
Credit: Accounts Receivable $300
Explanation: The $300 debt is now considered irrecoverable.
-
Recovering a Written‑Off Debt:
Debit: Accounts Receivable $300
Credit: Allowance for Doubtful Debts $300
Explanation: The debt was paid after being written off.
Ledger Accounts Example
| Date | Account | Debit | Credit | Balance |
|---|---|---|---|---|
| 1 Jan | Accounts Receivable | $10,000 | $10,000 | |
| 15 Jan | Allowance for Doubtful Debts | $1,200 | $1,200 | |
| 30 Jan | Accounts Receivable | $300 | $9,700 | |
| 30 Jan | Allowance for Doubtful Debts | $300 | $900 |
Exam Tip 💡
When you see a question about “recovering a written‑off debt”, remember the reverse entry: debit Accounts Receivable and credit Allowance for Doubtful Debts. This keeps the balance sheet accurate.
Quick Practice Problem
Company X had an allowance of $500 for doubtful debts. On 20 Feb, a customer who was previously written off pays $200. Prepare the journal entry.
Answer:
Debit: Accounts Receivable $200
Credit: Allowance for Doubtful Debts $200
Analogy Time 📚
Think of the allowance for doubtful debts as a raincoat you keep in your backpack. You don’t know if it will rain tomorrow, so you keep it just in case. When it actually rains (a debt is written off), you use the raincoat (allowance) to stay dry. If the sun comes out later and you need the raincoat again (the debt is recovered), you put it back in the backpack (reverse entry).
Revision
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