Irrecoverable debts and the allowance for irrecoverable debts

Writing off and recovering a debt

Irrecoverable debt (known to be lost): debit Irrecoverable debts (expense), credit the customer's account (or the trade receivables ledger control account).

Recovered later: reinstate the debt (debit customer, credit Irrecoverable debts recovered), then record the cash (debit Bank, credit customer). Reinstating first keeps a record that the customer did pay.

Write off known irrecoverable debts before calculating the allowance.

The allowance from a schedule of trade receivables

The allowance for irrecoverable debts (IAS term; formerly provision for doubtful debts) is an estimate of the receivables that may not be collected. Older debts are less likely to be paid, so a higher percentage is applied. This applies the prudence concept.

Recording the change

Only the change in the allowance goes to the statement of profit or loss:

• Increase: an expense (debit statement of profit or loss, credit Allowance account).
• Decrease: income, or a reduction in expenses (debit Allowance account, credit statement of profit or loss).

In the statement of financial position: trade receivables less the full allowance.

Allowance for irrecoverable debts account

Worked example

Using the schedule above, the allowance at the start of the year was £1,600. Find the amount charged and the receivables figure in the statement of financial position.

1. Required allowance = 1,770.
2. Increase = 1,770 - 1,600 = 170, charged as an expense.
3. Statement of financial position: trade receivables 65,200 less allowance 1,770 = 63,430.

Answer: Expense £170; net trade receivables £63,430.

Check yourself

1. Trade receivables are aged: 0 to 30 days £26,000 (1%), 31 to 60 days £9,000 (4%), over 60 days £4,000 (15%). Calculate the required allowance.
   Show answer

   £1220. 260 + 360 + 600 = 1,220.

2. The required allowance is £1,220 and the opening allowance is £1,500. By how much does the allowance decrease?
   Show answer

   £280. 1,500 - 1,220 = 280. A decrease is credited to the statement of profit or loss, increasing profit.

3. A decrease in the allowance for irrecoverable debts is shown in the statement of profit or loss as
   • an expense, reducing profit
   • income (or a reduction of expenses), increasing profit
   • a deduction from revenue
   • an adjustment to drawings
   Show answer

   income (or a reduction of expenses), increasing profit. Less is set aside than before, so the excess is released back to profit.

4. Trade receivables are £48,000 after writing off irrecoverable debts. The allowance is 3% of trade receivables. Find the figure for trade receivables in the statement of financial position.
   Show answer

   £46560. Allowance = 1,440; net = 46,560.

5. A debt of £400 written off last year is unexpectedly paid in full. What is the first entry?
   • Debit the customer's account, credit Irrecoverable debts recovered
   • Debit Bank, credit Sales
   • Debit Irrecoverable debts, credit the customer's account
   • Debit Bank, credit Allowance for irrecoverable debts
   Show answer

   Debit the customer's account, credit Irrecoverable debts recovered. The debt is reinstated first so the customer's record shows that they paid; then debit Bank, credit the customer.

6. Which accounting concept is the main reason for keeping an allowance for irrecoverable debts?
   • Business entity
   • Money measurement
   • Prudence
   • Historic cost
   Show answer

   Prudence. Prudence means assets such as receivables should not be overstated.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.