Irrecoverable Debts Written Off (Cambridge (CIE) IGCSE Accounting): Revision Note

Irrecoverable debts written off

What are irrecoverable debts?

• An irrecoverable debt occurs when a business is unable to receive payment from a credit customer for the amount they owe

  • The customer might have declared bankruptcy

  • The business might no longer be able to contact the customer

• Irrecoverable debts used to be referred to as bad debts

• Irrecoverable debts are written off by the business, as it is unlikely to receive these amounts

• Irrecoverable debts are written off in order to follow the accounting principle of prudence

  • Writing off irrecoverable debts reduces the amount owed by trade receivables

  • As a result, assets are not overstated

• A business will try to collect as much of the amount owed by the customer as possible before writing the debt off

• Irrecoverable debt is an expense to the business

  • It reduces the profit for the year

How do I record irrecoverable debts in the ledger accounts?

• Credit the relevant trade receivables account in the sales ledger

  • The amount they owe is decreasing

•  Debit the irrecoverable debts account in the nominal ledger

  • This is an expense

• The book of prime entry for irrecoverable debts written off is the journal

How can a business prevent irrecoverable debts?

• Ideally, a business does not want to write off any debts

• A business can prevent irrecoverable debts by:

  • Setting a credit limit for credit customers

    • This is a limit to how much a customer can owe at any time

  • Performing credit checks on potential new customers

    • This is useful if customers want to purchase a lot of goods

  • Communicating regularly with credit customers

    • Sending regular statements of accounts

    • Sending emails and calling customers to remind them of their balances

  • Taking legal action against customers who fail to pay for their goods

    • This is usually a last resort

    • This will cost the business so sometimes it will not be worthwhile if the debt is less than the legal fee