Irrecoverable debts and debts recovered Cambridge IGCSE Accounting revision
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In plain words
Selling on credit means trusting that customers will pay. Sometimes one does not: the customer goes bankrupt, or cannot be found. A debt that will never be collected is no longer an asset, so it is written off.
5 things to know
- An irrecoverable debt is an amount owed by a customer that will not be paid.
- To write it off: debit the irrecoverable debts account, credit the customer's account. The total is an expense in the statement of profit or loss.
- Writing off a debt reduces trade receivables. It is an application of prudence: assets and profit must not be overstated.
- A debt recovered is money received from a customer whose debt was written off earlier. Debit bank, credit the irrecoverable debts recovered account. It is added to income in the statement of profit or loss.
- Ways to reduce irrecoverable debts: check a new customer's credit record, set a credit limit, send invoices and statements promptly, offer cash discount for prompt payment, charge interest on overdue accounts, and stop supplying customers who do not pay.
Worked example
Pia owes $460 and is declared bankrupt. A first and final payment of $160 is received from her by bank transfer, and the rest is written off. State the entries in Pia's account.
- Pia's account has a debit balance of $460.
- Credit her account with the $160 received (debit bank).
- Credit her account with the remaining 460 − 160 = $300 written off (debit irrecoverable debts).
- Her account is now closed.
Tips and tricks
- Writing off a debt is about a known customer who cannot pay. An allowance for irrecoverable debts is an estimate about customers in general. Do not mix them up.
- A debt recovered is income. It does not reduce this year's irrecoverable debts expense unless the question says so.
It lands in your notebook with its questions as flashcards.
Irrecoverable debts and debts recovered: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What is an irrecoverable debt?
It is written off as an expense.
Which account is credited when a customer's debt is written off?
The debt is removed from the customer's account.
How is a debt recovered treated in the statement of profit or loss?
Money has come in that had been given up as lost.
Ben owes $700. He pays $200 and the rest is written off. What is the irrecoverable debt?
700 − 200.
Which would help to reduce irrecoverable debts?
It limits how much any one customer can owe.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
2 questions, 4 marks. Write your answers on paper, then check them.
Irrecoverable debts and debts recovered
Cambridge IGCSE Accounting 0452 · 4 marks · papermunch.org
Name ______________________________ Date ______________
State the double entry to write off a debt of $250 owed by Tom.[2]
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Debit irrecoverable debts $250. Credit Tom $250.
State two ways a business could reduce the risk of irrecoverable debts.[2]
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Check a customer's credit record before allowing credit. Set a credit limit for each customer. (Also: send statements promptly, or offer cash discount.)
Answers: Irrecoverable debts and debts recovered
- 1. Debit irrecoverable debts $250. Credit Tom $250.
- 2. Check a customer's credit record before allowing credit. Set a credit limit for each customer. (Also: send statements promptly, or offer cash discount.)