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