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Lecture notes for the introduction to irrecoverable and doubtful debts
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This briefly differentiates between irrecoverable and doubtful debts and how allowances for them are recorded.
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A bad or irrecoverable debt is a debt which is not expected to be paid. If the companydecides to give up expecting the debt if the customer is bankrupt, is settling a dispute about
price, etc, then the debt is written off. The debt is removed from the assets and the cost is
charged against profit for the period. To do this is the double entry accounts, irrecoverable
debt expenses is debited, and trade receivables is credited.
Doubtful debts are when the business is unsure whether they will receive payment for the
debts or not.
Companies have to estimate expected future losses from trade receivables. This is done by
creating an allowance for receivables for amounts that will not be recovered in the period.
In the statement of profit or loss, the allowance is recorded as an expense of irrecoverable
debt. On the other side of the double entry is a credit to a journal the allowance for
receivables.
In the statement of financial position, the allowance for receivables is offset against trade
receivables so they aren’t overstated. This is done by taking trade receivables less the
amount for allowance.
The longer the period a debt is outstanding, the higher the chance it will not be paid. This all
depends on the company’s relationship with the customer over the past period and
economic trends.
The allowance is credit in nature so increasing the allowance is a credit and decreasing it is a
debit. When increasing, it is charged as an expense in the irrecoverable debt expense which
is then debited or credited if allowance is decreased.
If a debt is unexpectedly paid, cash is debited, and irrecoverable debt expense is credited.
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