What is the difference between an irrecoverable debt and an allowance for irrecoverable debts?
Question 1 Report
What is the difference between an irrecoverable debt and an allowance for irrecoverable debts?
Answer Details
The correct answer is an irrecoverable debt is a definite loss; an allowance is an estimate of potential losses.
An irrecoverable debt (also called a bad debt) is a specific debt that is known to be unrecoverable. The customer cannot or will not pay, and the debt is written off completely.
An allowance for irrecoverable debts (also called a provision for doubtful debts) is an estimate of the total debts that may not be collected. It is based on experience and judgement, not certainty. The allowance reduces the trade receivables figure on the statement of financial position to show a more realistic expected recovery.
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