An irrecoverable debt traditionally referred to as a bad debt is a debt which is considered to be uncollectable.
If a debt is considered to be uncollectible then it is prudent to remove it totally from the amounts owing to the business and to charge the amount as an expense to the statement of profit or loss. The original sale remains in the accounting records as this did actually take place. The debt, however, is removed and an expense is charged to the statement of profit or loss for irrecoverable debts. The accounting entries are:
The accounting entries are:
Debit: Irrecoverable debts expense, and Credit: Trade receivables
The consequence of this is that profit is reduced and receivables in the statement of financial position are also reduced.
Ab Co have total receivables at the end of its accounting period of $45,000. Included in this total is an amount of $790 owed by J Singh who has been declared bankrupt and $1,240 due from P Chan who has disappeared.
Write up the receivables general ledger and irrecoverable debts expense account to reflect the writing-off of these two irrecoverable debts.
For a suggested answer, see the 'Answers' section at the end of the book.