What is considered an irrecoverable debt?

An irrecoverable debt refers to a situation where it has become clear that a debt will not be recovered. This can happen for various reasons, such as the debtor declaring bankruptcy, being untraceable, or simply not having the financial capacity to repay the debt. As such, businesses must write off these debts to accurately reflect their financial position. By recognizing an irrecoverable debt, the company adheres to the principle of prudence in accounting, ensuring that their financial statements do not overstate the amounts expected to be received.

The other options describe scenarios that do not align with the defining characteristics of irrecoverable debts. For instance, a debt expected to be settled or one that has a high probability of collection indicates a likelihood of recovery, which directly contradicts the nature of an irrecoverable debt. Similarly, a debt that is partially recoverable still suggests that some amount can be collected, which again is inconsistent with the definition of irrecoverable debts.