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

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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 a risk that some customers may not pay their outstanding invoices. These uncollectible amounts are known as irrecoverable debts or doubtful debts.

To account for these potential losses, businesses create a provision for doubtful debts. This is an estimate of the amount of outstanding debts that are unlikely to be collected.

Methods of Accounting for Doubtful Debts

There are two main methods:

  • Percentage of Sales Method: A percentage of credit sales is estimated as doubtful debts.
  • Aging of Debts Method: Debts are categorized by how long they have been outstanding (e.g., 30-60 days, 60-90 days, over 90 days), and a higher percentage is applied to older debts.

The provisions for doubtful debts are calculated and adjusted at the end of each accounting period.

Writing off Debts

When a debt is deemed irrecoverable, it is written off. This means it is removed from the accounts.

The process involves two journal entries:

  1. To write off the debt from the Accounts Receivable (or Debtors) account.
  2. To reduce the Provision for Doubtful Debts account.

Journal Entries and Ledger Accounts

Journal Entry for Writing Off a Debt

The journal entry to write off a debt involves the following:

Date Account Debit Credit

Date of write-off

 Accounts Receivable (Debtors) $$Amount of debt to be written off$$
Provision for Doubtful Debts $$Amount of debt to be written off$$

Explanation:

  • The Accounts Receivable (Debtors) account is debited to reduce the balance as the debt is no longer expected to be recovered.
  • The Provision for Doubtful Debts account is credited to reduce the balance, reflecting the decrease in the estimated amount of uncollectible debts.

Ledger Accounts

Accounts Receivable (Debtors) Ledger

This ledger account shows the total amount owed to the business by its customers.

Date Particulars Debit Credit
Opening Balance

Initial balance of debtors

Write-off of Debt

Debit to reduce debtors

 $$Amount of debt written off$$
Closing Balance

Remaining balance of debtors

 $$Remaining balance$$

Provision for Doubtful Debts Ledger

This ledger account shows the estimated amount of debts that are unlikely to be collected.

Date Particulars Debit Credit
Opening Balance

Initial balance of provision

Adjustment (Increase/Decrease)

Increase/Decrease in provision

 $$Increase/Decrease amount$$

Write-off of Debt

Credit to reduce provision

 $$Amount written off$$
Closing Balance

Final balance of provision

 $$Final balance$$ $$Final balance$$

Example

On 15th June, a debt of $500 from Customer X was deemed irrecoverable. The provision for doubtful debts was $100.

  1. Journal Entry:
    Date Account Debit Credit
    15th June Accounts Receivable (Debtors) $500
    Provision for Doubtful Debts $500
  2. Ledger Account Adjustments:
    • Accounts Receivable (Debtors): Debit $500
    • Provision for Doubtful Debts: Credit $500

Conclusion

Properly accounting for irrecoverable debts is crucial for presenting a realistic view of a business's financial position. By creating a provision for doubtful debts and writing off irrecoverable amounts, businesses ensure their financial statements accurately reflect their assets and profitability.