Year-end · Level: Exam specials
Journal entry: Irrecoverable debt
When a receivable is definitely lost, it is written off and the VAT on it is reclaimed.
Worked example
Johnson Ltd has gone bankrupt. Our receivable of £6,180.00 (including 20% VAT) is definitely lost; VAT bad debt relief applies.
Correct journal entry
Irrecoverable debts £5,150.00, Output VAT £1,030.00 / Trade receivables £6,180.00
Debit
Irrecoverable debts£5,150.00
Output VAT£1,030.00
Credit
Trade receivables£6,180.00
Why?
- Irrecoverable debts: expense incurred → debit
- Output VAT: liability decreases → debit
- Trade receivables: asset decreases → credit
Calculation
- Net loss £5,150.00; the VAT of £1,030.00 is reclaimed.
Typical mistake
Expensing the gross amount without correcting the VAT.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
Wright plc has gone bankrupt. Our receivable of £4,800.00 (including 20% VAT) is definitely lost; VAT bad debt relief applies.
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 journal entry for irrecoverable debt?
Example: Irrecoverable debts £5,150.00, Output VAT £1,030.00 / Trade receivables £6,180.00.
How do I recognise this case?
When a receivable is definitely lost, it is written off and the VAT on it is reclaimed.
What is the typical mistake?
Expensing the gross amount without correcting the VAT.