IGCSE Accounting 0452 - 4.4 Irrecoverable Debts and Provision for Doubtful Debts

Objective

To prepare ledger accounts and journal entries to record the recovery of debts written off.

Understanding Irrecoverable Debts

When a business extends credit to customers, there's always a risk that some debts may not be collected. These debts are known as irrecoverable debts. A provision for doubtful debts is an estimate of the amount of irrecoverable debts.

When a debt is deemed irrecoverable, it is written off. This means the amount is removed from the accounts receivable and a corresponding expense is recorded.

Journal Entries for Writing Off Debts

The journal entry to write off a debt involves two accounts:

• Bad Debt Expense: This is an expense account that reflects the estimated loss from irrecoverable debts.
• Debtors Control (or specific debtor account): This account is reduced to reflect the debt that is no longer expected to be collected.

The general format of the journal entry is:

Date | Account                                  | Debit (£) | Credit (£)
-----|------------------------------------------|-----------|-----------
...  | Bad Debt Expense                       | ...       |           
...  | Debtors Control (or specific debtor) |           | ...       
...  | *Explanation: To write off irrecoverable debt* |           |           

Ledger Accounts

The following ledger accounts are involved:

• Debtors Control: This is a control account that summarizes all individual debtor accounts.
• Specific Debtor Accounts: Individual accounts for each customer to whom credit has been extended.
• Bad Debt Expense: An expense account.

Recovery of Written-Off Debts

Sometimes, a debt that has been written off can be recovered. When this happens, the debt needs to be reinstated in the accounts.

The journal entry to record the recovery of a written-off debt involves:

• Debtors Control (or specific debtor account): This account is debited to reinstate the debt.
• Bad Debt Expense: This account is credited to reverse the previous bad debt expense.

The general format of the journal entry is:

Date | Account                                  | Debit (£) | Credit (£)
-----|------------------------------------------|-----------|-----------
...  | Debtors Control (or specific debtor) | ...       |           
...  | Bad Debt Expense                       |           | ...       
...  | *Explanation: To recover previously written-off debt* |           |           

Example

Scenario: A business has written off a debt of £500 from a customer, John Smith. Later, the business recovers the full amount.

Journal Entry:

Date	Account	Debit (£)	Credit (£)
2023-10-26	Debtors Control	500
2023-10-26	Bad Debt Expense		500
2023-10-26	*To recover previously written-off debt from John Smith*

Explanation:

• The Debtors Control account is debited to increase the amount owed by John Smith.
• The Bad Debt Expense account is credited to reverse the previous expense.

Example: Specific Debtor Account

Scenario: A business has written off a debt of £200 from a customer, Jane Doe. Later, the business recovers the full amount.

Journal Entry:

Date	Account	Debit (£)	Credit (£)
2023-10-26	Jane Doe	200
2023-10-26	Bad Debt Expense		200
2023-10-26	*To recover previously written-off debt from Jane Doe*

Explanation:

• The Jane Doe account is debited to increase the amount owed by Jane Doe.
• The Bad Debt Expense account is credited to reverse the previous expense.

Practice Questions

1. A business writes off a debt of £150 from Mr. Brown. Prepare the journal entry.
2. A business recovers £300 from a debt that was previously written off to Mrs. Green. Prepare the journal entry.