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Cambridge (CIE) O Level Accounting
Revision Notes
Irrecoverable Debts
Exam code: 7707
Lucy Kirkham
Dan Finlay
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
Updated on 16 June 2025
Irrecoverable debts written off
What are irrecoverable debts?
An irrecoverable debt occurs when a business is unable to receive payment from a credit customer for
the amount they owe
The customer might have declared bankruptcy
The business might no longer be able to contact the customer
Irrecoverable debts used to be referred to as bad debts
Irrecoverable debts are written off by the business, as it is unlikely to receive these amounts
Irrecoverable debts are written off in order to follow the accounting principle of prudence
Writing off irrecoverable debts reduces the amount owed by trade receivables
As a result, assets are not overstated
A business will try to collect as much of the amount owed by the customer as possible before writing the
debt off
Irrecoverable debt is an expense to the business
It reduces the profit for the year
How do I record irrecoverable debts written off in the ledger accounts?
Credit the relevant trade receivables account in the sales ledger
The amount they owe is decreasing
Debit the irrecoverable debts account in the nominal ledger
This is an expense
The book of prime entry for irrecoverable debts written off is the journal
How can a business prevent irrecoverable debts?
Ideally, a business does not want to write off any debts
A business can prevent irrecoverable debts by:
Setting a credit limit for credit customers
This is a limit to how much a customer can owe at any time
Performing credit checks on potential new customers
This is useful if customers want to purchase a lot of goods
Communicating regularly with credit customers
Sending regular statements of accounts
Sending emails and calling customers to remind them of their balances
Taking legal action against customers who fail to pay for their goods
This is usually a last resort
This will cost the business so sometimes it will not be worthwhile if the debt is less than the legal fee
Worked Example
Caesar maintains a full set of accounting records. At the start of January 2024, a credit customer, Julius,
owes Caesar $1 200. On 3 January 2024, Caesar received $500 in cash from Julius. On 25 January 2024,
Caesar is notified that Julius has declared bankruptcy and decides to write off the rest of his debt and
close his account.
Complete the account for Julius in Caesar’s sales ledger.
Answer
Identify which side to post each transaction.
At the start of January, Julius owes Caesar money
Therefore the opening balance will be on the debit side
The payment made by Julius reduces the amount he owes
Therefore it is entered on the credit side
The remaining balance, $700, is written off
This will be entered on the credit side to balance the account
Caesar
Julius Sales Ledger Account
Date
Details
Date
Details
$
2024
Jan 1
Balance b/d
1 200
2024
Jan 3
Cash
500
Jan 25
Irrecoverable debts
700
1 200
1 200
Recovery of debts written off
Can irrecoverable debt written off be recovered?
It is possible that a business receives a payment from a customer for a debt that has already been
written off
The payment could be for the full amount or part of the amount
This can happen if:
The business manages to contact the customer
The customer makes an unexpected payment
The money is retrieved using debt collection services
How do I record the recovery of debts written off in the ledger accounts?
The book of prime entry for the recovery of debts written off is the cash book
There are two methods for recording the recovery of debts written off
One method is usually used if the recovery occurs within the same financial period as the debts being
written off
The debt is added back to the relevant trade receivables account
Debit the trade receivables account in the sales ledger with the amount received
Credit the debts recovered account
The payment then is recorded as normal
Debit the cash or bank account
Credit the trade receivables account
The other method is usually used if the debt was written off in a previous financial period
The sales ledger is not used
Debit the cash or bank account
Credit the debts recovered account
Examiner Tips and Tricks
You can use either method in an exam question.
How does the recovery of debts written off affect the profit for the year?
Recovery of debts written off increases profit for the year
It can be treated as an income to the business
There are two options for dealing with debts recovered at the end of the year
The balance in the debts recovered account is transferred to the irrecoverable debts account to reduce
that balance
This reduced balance is then transferred as an expense to the income statement
This method is usually used if the recovery occurs within the same financial period as the debts being
written off
Or the balance in the debts recovered account is transferred as an income directly to the income
statement
This method is usually used if the debt was written off in a different financial period
This method is also used if the balance in the debts recovered account is bigger than the balance in the
irrecoverable debts account
Worked Example
Tim sells goods on credit. Tim maintains a full set of accounting records, and his financial year ends on
29 February 2024.
Henry, a customer, had a balance of $750 owing to Tim. On 3 May 2023, Henry’s balance of $750 was
written off by Tim as irrecoverable debt after six months of failed attempts at contacting Henry. On 1
December 2023, Tim received a cheque for $300 from Henry. No other debts were written off, and no
other debts were recovered in that financial year.
Record the information in the irrecoverable debts account and the debts recovered account. Close the
accounts at the end of the financial year by balancing or by making a transfer to an appropriate account.
Answer
Post the written off debt, $750, to the debit side of the irrecoverable debts account as it is an expense