Irrecoverable Debts

Question 1

What is a irrecoverable debt?

Answer 1

it is a debt owing to our business which is unlikely to be paid, therefore we write it off and record an expense in the income statement

Question 2

What is the effect of irrecoverable debt on the financial statements?

Answer 2

Profit for the year is reduced
Capital reduced in statement of financial position
Trade receivable in the statement of financial position reduced

Question 3

Why do we account for irrecoverable debts?

Answer 3

so that the statement of financial position shows an accurate value for trade receivables

income statement shows lower profit for the year

assets of trade receivables are not overstated

Question 4

What is provision for irrecoverable debts?

Answer 4

estimate of the proportion of trade receivable that are doubtful and will become irrecoverable debts