Irrecoverable Debts And Allowance For Irrecoverable Debts

Selling on credit is how most businesses grow, but it comes with a risk: some customers will never pay. When all reasonable efforts to collect have failed, the amount owing becomes an irrecoverable debt, and accounting has a precise, prudent way of dealing with it. This topic shows you how to remove a hopeless debt from the books, what to do on the lucky occasion a written-off customer pays after all, and how a business sets aside an allowance for the debts it expects to lose in future.

You will learn to make the journal entries and ledger accounts that examiners ask for again and again, and to see exactly how each one flows through the income statement and the statement of financial position. By the end you will know the single most important rule of the allowance account: in every year after the first, only the change in the allowance touches profit, never the whole balance. Master that and a whole family of exam questions becomes routine.