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Irrecoverable Debts and Provision for Doubtful Debts

Irrecoverable Debts

Irrecoverable debts (also called bad debts written off) occur where a credit customer will not pay the amount owed — for example because they have become bankrupt.

Statement	Treatment
Income statement	Shown as an expense in the less expenses section
Statement of financial position	If given as additional information, deduct from trade receivables in current assets; if already in the trial balance, it has already been removed — do not adjust again

Irrecoverable Debts Recovered

Occurs where a previously written-off debt is later recovered, either in part or in full.

Statement	Treatment
Income statement	Deducted from irrecoverable debts expense (net presentation); if no other irrecoverable debts exist, shown below gross profit as income
Statement of financial position	If given as additional information, added to bank/cash; if already in the trial balance, do not adjust again

Provision for Doubtful Debts (PDD)

A provision for doubtful debts is created to account for potential non-payment from credit customers.

Specific provision — a particular customer account or amount is identified as doubtful (e.g. non-payment within the agreed credit period, or dishonoured cheque)
General provision — calculated as a percentage of all remaining trade receivables

Calculating the New PDD and Change

Step 1  Apply specific provision (identify the doubtful customer amount)
Step 2  Apply general provision % to all remaining trade receivables
        (i.e. total receivables less the specific amount)
Step 3  New PDD = specific provision + general provision
Step 4  Change in PDD = New PDD − Old PDD (from trial balance)
        Positive = increase; Negative = decrease

Example (increase): Trade receivables £26 000; specific customer £500 doubtful; general provision 5% on remainder. General provision: (26 000 − 500) × 5% = £1 275 New PDD: 500 + 1 275 = £1 775 Change: 1 775 − 1 450 (old PDD) = £325 increase Income statement: Increase in PDD shown as an expense = £325 SFP: Trade receivables (26 000 − 1 775) = £24 225

Example (decrease): Trade receivables £19 800; specific £1 250 doubtful; general 4%; old PDD £2 560. General provision: (19 800 − 1 250) × 4% = £742 New PDD: 1 250 + 742 = £1 992 Change: 1 992 − 2 560 = £(568) decrease Income statement: Decrease in PDD shown below gross profit (income) = £568 SFP: Trade receivables (19 800 − 1 992) = £17 808

Disclosure Summary