Syllabus D. Recording Transactions And Events D8. Receivables and payables

D8eg. Write off an irrecoverable debt 4 / 7

Syllabus D8eg)

e) Prepare the bookkeeping entries to write off an irrecoverable debt.

g) Identify the impact of irrecoverable debts on the statement of profit or loss and on the statement of financial position.

Irrecoverable debts (bad debts)

Irrecoverable debts (bad debts) are specific debts owed to a business which it decides are never going to be paid.

If a debt is definitely irrecoverable, the prudence concept dictates it should be written off to the statement of profit or loss as a bad debt.

The value of outstanding receivables must be reduced by the amount written off.

This is because the customers are no longer expected to pay, and it would be misleading to show them in the statement of financial position as current assets of the business for which cash payment is expected within one year.

Accounting treatment

Dr  Bad debts expense (I/S)
Cr  Trade Receivables (SOFP)