Irrecoverable Debts And Provision For Doubtful Debts (Copy)
Cheat Sheet: 4.4 Irrecoverable Debts and Provision for Doubtful Debts
O Level and IGCSE Accounting – Quick Revision
Key Terms and Definitions
| Term | Definition |
|---|---|
| Irrecoverable Debt (Bad Debt) | A debt that is certain to never be received. It must be written off as a loss. |
| Recovery of Bad Debt | When a previously written-off debt is unexpectedly paid by the customer. |
| Provision for Doubtful Debts | An estimate of debts that may become irrecoverable in the future. |
Irrecoverable Debts (Bad Debts)
Journal Entry for Writing Off a Bad Debt:
- Dr Irrecoverable Debts (Expense)
- Cr Trade Receivables
Example:
Customer A owes $500 but is bankrupt.
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Dec | Irrecoverable Debts | 500 | |
| 31 Dec | Trade Receivables – A | 500 |
Recovery of Irrecoverable Debts
Journal Entry for Recovering a Previously Written-Off Debt:
- Dr Bank
- Cr Irrecoverable Debts Recovered (Income)
Example:
Customer A pays $200 that had been written off earlier.
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 15 Jan | Bank | 200 | |
| 15 Jan | Irrecoverable Debts Recovered | 200 |
Provision for Doubtful Debts
Why It’s Maintained:
- To comply with the prudence principle: do not overstate assets or profits.
- Trade receivables may not all be collected in full.
Creation of Provision (First Year):
If trade receivables = $10,000 and provision = 5%,
Required provision = 0.05 × 10,000 = $500
Journal Entry:
- Dr Income Statement
- Cr Provision for Doubtful Debts
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Dec | Income Statement (Expense) | 500 | |
| 31 Dec | Provision for Doubtful Debts | 500 |
Increase in Provision (Subsequent Year)
Previous provision: $500
New trade receivables: $12,000 → New provision = $600
Increase = $100
Journal Entry:
- Dr Income Statement (Expense)
- Cr Provision for Doubtful Debts
Decrease in Provision
Previous provision: $600
New trade receivables: $9,000 → New provision = $450
Decrease = $150
Journal Entry:
- Dr Provision for Doubtful Debts
- Cr Income Statement (Income)
Ledger Format: Provision for Doubtful Debts Account
| Date | Details | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Dec | Balance c/d | 500 | |
| 1 Jan | Balance b/d | 500 |
Summary Table
| Type | Journal Entry | Effect on P/L |
|---|---|---|
| Irrecoverable Debt | Dr Irrecoverable Debts / Cr Trade Receivables | Increases Expense |
| Recovery of Bad Debt | Dr Bank / Cr Irrecoverable Debts Recovered | Increases Income |
| Creation of Provision | Dr Income Statement / Cr Provision for Doubtful Debts | Increases Expense |
| Increase in Provision | Dr Income Statement / Cr Provision for Doubtful Debts | Increases Expense |
| Decrease in Provision | Dr Provision for Doubtful Debts / Cr Income Statement | Decreases Expense |