understand the meaning of irrecoverable debts and recovery of debts written off
4.4 Irrecoverable Debts and Provision for Doubtful Debts
What is an Irrecoverable Debt? 💸
An irrecoverable debt is money that a company has given to a customer (a credit sale) but will never get back. Think of it like lending your favourite video game to a friend who never returns it.
Why do we need a Provision for Doubtful Debts? 📉
Because not all customers pay on time, we must guess how much we might lose. The provision is a safety net that shows the company’s true profit.
- Prevents over‑stating profits.
- Helps investors see real financial health.
- Complies with accounting standards.
How to Calculate the Provision? ➕
Use the Percentage of Receivables Method:
$P = \text{Total Receivables} \times \text{Estimated % Uncollectible}$
Example:
| Item | Amount (£) |
|---|---|
| Total Receivables | £12,000 |
| Estimated % Uncollectible | 5 % |
| Provision for Doubtful Debts | £600 |
So we record a £600 provision.
Writing Off a Debt 🧾
When a debt is confirmed as irrecoverable, we write it off:
- Debit Provision for Doubtful Debts (reduces the provision).
- Credit Accounts Receivable (removes the debt from the books).
Example: If the £600 provision covers a £600 debt that is now written off, the journal entry is:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Provision for Doubtful Debts | £600 | - |
| Accounts Receivable | - | £600 |
Exam Tips for 4.4 📝
Remember:
- Identify the method used (percentage of receivables or specific identification).
- Show the calculation steps clearly.
- Explain the impact on the income statement and balance sheet.
- Use correct accounting terms: provision, write‑off, irrecoverable debt.
Practice with past paper questions and check that your journal entries balance.
Revision
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