Irrecoverable

debts
Recording recovery of debts written off
 Recording recovery of debts
written off
• sometimes a debt that is written off is later paid.
• When the debt is paid, the entry to be posted is:
• Debit: the cash book.
• Credit: irrecoverable debts recovered account.
• Another method is to post two entries: one for reinstating
the debt and the other to record payment.
• The entry to reinstate the debt is:
• Debit: the debtor’s account.
• Credit: irrecoverable debts recovered account.
• The entry to record payment is:
• Debit: cash or bank.
• The advantage of this second method is that a record is
maintained in the debtor’s account of the debt being honoured.
• This will act as a guide for granting the debtor credit in the future.
• The debtor’s account is closed off.
• The irrecoverable debts recovered account is transferred to the
credit of the income statement as an income and the profit for
the year is increased.
 Avoiding irrecoverable debts

• Irrecoverable debts rise when credit is extended to

customers,
The best way is by selling only for cash or cheque.
What would be the disadvantage of not extending credit to
the customers?
 credit control.
• The business can assess the creditworthiness of a potential customer
by asking for trade references or pay for a credit check.
• A lower credit limit for new customers could be set until trust is built
in the ability of the customer to pay their debts on time.
• An up-to-date record of what a customer owes should be maintained
and a note should be made of any customers approaching their credit
limit.
 Other means of avoiding debts:

• The business should draw up clear terms and conditions and inform its customers of
them, perhaps by publishing them on their website or invoices.

• Customers should be reminded that the business has a right to charge interest on late

payments (even if the business has no intention of implementing this). This is a good

way of minimising late payments or irrecoverable debts as it motivates customers to pay on time.

• Invoices and statements of account should be sent promptly. An offer of discounts for early payment
displayed on the invoice or the statement of account is a good way of

encouraging customers to pay on time.

• The statement of account is also a means of chasing payments, as
is phoning the debtor as soon as the debt becomes due.
• Reminder letters can also be sent, though these often tend to be
ignored.
• To prevent a debt from increasing, no further goods should be
sold to the customer on credit.
• If the customer’s reason for non-payment is faulty goods, it is
important to address this and resolve it quickly, especially if the
business wants to retain the customer.