Irrecoverable debts: writing off a receivable
When a customer will definitely not pay, the receivable is written off as an expense. An allowance covers debts that are only doubtful.
Updated
Writing off an irrecoverable debt
A debt is irrecoverable when it is certain the money will not come, for example when the customer has gone into liquidation with nothing left for creditors.
Dr Irrecoverable debts expense Cr Trade receivables
UK VAT-registered businesses can reclaim the VAT on the debt through bad debt relief once it is more than six months overdue and has been written off in the accounts.
Allowance for receivables
For debts that are only doubtful, an allowance for receivables is set up instead: Dr Irrecoverable debts expense, Cr Allowance for receivables. Only the change in the allowance each year goes through the income statement.
Check yourself
Which account is credited when a receivable is written off?
More on accounting
Typical exam mistakes
- Writing off a debt that is only doubtful: that needs an allowance, not a write-off.
- Putting the whole allowance through the income statement every year instead of only the change.
Your turn
Three transactions from the journal entry trainer: choose the accounts, enter the amounts and check.
Transaction
We take out a loan of £63,000.00. The bank pays the amount into our account.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the difference between an irrecoverable debt and a doubtful debt?+
An irrecoverable debt will certainly not be paid and is written off. A doubtful debt might not be paid and is covered by an allowance for receivables.