Please help with irrecoverable and adjustment account problem

shevro

Hi there, I am having major issues trying to understand when to use the doubtful debt adjustment a/c and the irrecoverable debts a/c in respective to using double entry with the doubtful debts a/c. In the Accounts Preparation module some of the questions have answers which vary, either using the irrecoverable debt a/c with the doubtful debt a/c to increase/decrease an allowance or using the doubtful debt adjustment a/c with the doubtful debt a/c for the same thing. Does anyone have any understanding of this, any information would be very grateful, thanks

LearningAcademy

Hi @shevro

1 - Irrecoverable Debt is a write off - used when it is clear that a particular customer is not going to pay.

Double entry would be:
Debit: Irrecoverable Debt Written Off (as an expense that will be charged to the profits)
Debit: VAT Control a/c (if there is any VAT component to the debt)
Credit: SLCA/Receivables

Please remember to post the entry in the individual customer's account in the Sales (subsidiary) Ledger as well.

2 - Allowance for Doubtful Debt is created as a prudent measure to guard against possible instances of bad debts in future. However, at this juncture, it is not know which specific customer will not pay (otherwise it will be written off as per point 1 above). It is therefore, created as a provision against the debtors (receivables) in general based on previous experience or commercial judgement (say 2% of the debtors outstanding at the year end).

To create the allowance in the first instance,

Debit: Allowance for DD Adjustment a/c (as a charge against profits for the year)
Credit: Allowance for DD (this will appear in the St of Fin Position/Balance Sheet)

Once this allowance is created, it has to be reviewed in the subsequent years.

If it requires to be increased (either due to increase in the debtors outstanding or due to increase in the rate as felt necessary) the above entry will be repeated but with the incremental amount only.

However, if the allowance needs to be reduced, a reverse entry (only for the difference) will have to passed as under:

Debit: Allowance for DD
Credit: Allowance for DD Adjustment (treated as misc. income in Income St / P&L)

Trust, this makes sense.
Thanks