Irrecoverable debts and provision for doubtful debts

• An irrecoverable debt is an amount owed by a credit customer that will not be paid. Write it off: Dr Irrecoverable debts, Cr the customer’s account.
• If a debt written off is later paid, reinstate the debt, then record the receipt.
• A provision for doubtful debts is an estimate of the trade receivables that may not be collected, based on prudence.
• Only the increase or decrease in the provision goes to the income statement; the full provision is deducted from trade receivables in the statement of financial position.

The customer will not pay

A debt becomes irrecoverable when there is no reasonable chance of collecting it: the customer has become bankrupt, has disappeared, or the amount is too small to be worth pursuing. Keeping it in trade receivables would overstate assets, so it is written off as an expense.

Worked example

During 2025 two debts were written off: K Osei $520 on 14 March and P Lam $380 on 30 September. Prepare the irrecoverable debts account for the year ended 31 December 2025.

The total for the year is charged as an expense in the income statement. The customer accounts are closed, so trade receivables fall by the same amount.

Reinstate first, then record the money

If a customer later pays a debt that was written off, first reinstate the debt so the customer’s account shows the full history (useful if they ask for credit again), then record the receipt.

The irrecoverable debts recovered is other income in the income statement (or it may be credited to the irrecoverable debts account, reducing the expense).

Prudence and a realistic value for receivables

At the year end some trade receivables are doubtful: they may or may not be paid. The business does not know which ones, so it estimates a provision, usually a percentage of trade receivables (after writing off any irrecoverable debts).

• Prudence: possible losses are recognised now, so profit is not overstated.
• Matching: the expected loss is charged in the year the credit sales were made.
• Realistic asset value: trade receivables in the statement of financial position show the amount expected to be collected.