CAT / FIA FFM Syllabus F. Credit Management - F4e.Writing off debts - Notes ^{5 / 7}

A debt can become irrecoverable for a variety of reasons.

It might have been 'high risk' in the first place.

A doubtful debt

is a debt for which there is some uncertainty as to whether it will be paid.

A bad (irrecoverable) debt

is a debt which will not be paid.

Doubtful debts and bad (irrecoverable) debts reduce profits

(Normally, a customer's receivable account is defined as a 'Current asset' which should be liquidated within 12 months.)

1. An allowance may have to be made against doubtful debts in the accounts, either against specific customers or as a percentage of total receivables, based on past experience.

2. Even if the doubtful debt is eventually repaid in full, there will still be additional expenses relating to:

   (i) The effect on cash flow, especially if the debt is large
   (ii) The administration expenses of debt recovery procedures

3. Irrecoverable debts, which will never be recovered, can be written off against profits.

   Irrecoverable debts relating to a specific customer are allowable for tax purposes, although general allowances are not.