What is the double entry for recording an irrecoverable debt?

When recording an irrecoverable debt, the proper double entry involves recognizing the expense related to that bad debt in the Statement of Profit or Loss (SPL) and simultaneously reducing the asset on the Statement of Financial Position (SFP) that represents the amount owed by a debtor.

The entry debits the irrecoverable debt account, which reflects the expense associated with the amount that will not be collected. By debiting this account, the expenses of the business are increased, which impacts the net profit. On the credit side, the receivables account is reduced since the business can no longer expect to receive that amount. This reflects a decrease in expected future cash inflows, which is accurately represented on the balance sheet.

This approach aligns with the principles of accrual accounting, where expenses are recorded when they are incurred, irrespective of cash flow. Therefore, recognizing the irrecoverable debt in this manner correctly reflects the financial position and performance of the organization.