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

Objective

To understand the meaning of irrecoverable debts and the process of writing off debts and recovering written-off debts.

Irrecoverable Debts

Irrecoverable debts are amounts owed to a business that are highly unlikely to be collected. These debts may be due to various reasons, such as the debtor becoming insolvent, bankruptcy, or simply being unable to pay.

It's important for businesses to recognize and account for these debts because they represent a loss to the company.

• Debts that are past their due date for a significant period.
• Debtors who have declared bankruptcy.
• Debtors who have disappeared and cannot be traced.
• Debtors with a history of consistently late or non-payment.

Provision for Doubtful Debts

A provision for doubtful debts is an estimate of the amount of irrecoverable debts within a company's accounts. This is an accounting method used to present a more realistic picture of a business's financial position.

Instead of showing the full amount of all debts owed to the company, a provision is created to reduce the reported amount to the amount that is realistically expected to be collected.

The provision is calculated using various methods, such as:

• Percentage of Credit Sales: A percentage of credit sales is estimated as irrecoverable.
• Aging of Debts: Debts are categorized by how long they have been outstanding, with older debts having a higher probability of being irrecoverable.

Writing Off Debts

Writing off a debt means removing it from the company's accounts because it is considered irrecoverable. This is done by reducing the balance of the account receivable (or debtors) and recording a debit entry to a 'Provision for Doubtful Debts' account.

The journal entry for writing off a debt is as follows:

Debit: Provision for Doubtful Debts

Credit: Debtors (or Account Receivable)

Recovery of Written-Off Debts

Sometimes, after a debt has been written off, the company may later receive payment. In this case, the debt needs to be recovered. This involves reversing the original write-off entry and recording a recovery entry.

The journal entry for recovering a written-off debt is:

Debit: Debtors (or Account Receivable)

Credit: Provision for Doubtful Debts

Example Table

Date	Description	Debit (£)	Credit (£)
2023-01-15	Credit Sales		10,000
2023-03-31	Provision for Doubtful Debts (Estimated 2%)	200
2023-06-30	Write-off of Debt to John Smith (£500)	500
2023-09-30	Recovery from John Smith (£200)		200

Note: This is a simplified example. In a real-world scenario, the calculation of the provision for doubtful debts would be more complex and based on specific accounting methods.