SingaporeAccountingSyllabus dot point

How do we account for a customer's debt that will not be paid, and for the risk that some others may not pay?

Write off irrecoverable debts and create or adjust an allowance for doubtful debts

A focused answer to the O-Level Principles of Accounts outcome on bad debts. Writing off an irrecoverable debt, creating and adjusting the allowance for doubtful debts, and the effect on profit and on receivables.

Generated by Claude Opus 4.89 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to write off an irrecoverable debt and to create or adjust an allowance for doubtful debts. The central insight rests on prudence: when a debt is known to be uncollectible it is removed entirely (written off), and where some receivables may not pay, an allowance reduces them to a realistic figure, so assets and profit are not overstated.

The answer

Irrecoverable (bad) debts

An irrecoverable debt is one the business is sure will not be paid (the customer is insolvent or has disappeared). It is written off:

Debit Irrecoverable debts (an expense in the income statement).
Credit the customer (the receivable is removed).

This recognises the loss and clears the worthless receivable from the books.

The allowance for doubtful debts

Even among debts not yet written off, experience says some may not pay. The allowance for doubtful debts is an estimate of that risk, set against receivables. It is usually a percentage of receivables (after any write-offs). Creating it:

Debit Irrecoverable debts (or an allowance expense).
Credit Allowance for doubtful debts (a contra-asset).

Only the change hits profit

The allowance is carried forward each year. In later years, only the change in the allowance affects the income statement:

Change	Treatment
Allowance increased	The increase is charged as an expense
Allowance decreased	The decrease is credited (reduces expense / other income)

This avoids charging the whole allowance again each year.

Presentation

In the statement of financial position, receivables are shown net:

\text{Net receivables} = \text{Receivables after write-offs} - \text{Allowance for doubtful debts}

Worked example

At 31 December, before adjustments, receivables are $\$ 60,000 $. A debt of$ \ $3\,000$ owed by Devi is irrecoverable and is to be written off. The business then sets an allowance for doubtful debts at $5\%$ of the remaining receivables. Last year's allowance was $\$ 2,000$. Show the entries and the net receivables.

Step 1: Write off Devi's debt

Debit Irrecoverable debts $\$ 3,000 $; Credit Devi$ \ $3\,000$ . Devi's account closes; the $\$ 3,000$ is an expense this year.

Step 2: Find the receivables after the write-off

Receivables $= 60\,000 - 3\,000 = \$ 57,000$.

Step 3: Calculate the new allowance and the change

New allowance $= 5\% \times 57\,000 = \$ 2,850 $. Last year's was$ \ $2\,000$ , so the allowance increases by $850$ . Charge only the increase: Debit Irrecoverable debts $\$ 850 $; Credit Allowance for doubtful debts$ \ $850$ .

Step 4: State net receivables and the income statement charge

	$\$ $
Receivables after write-off	57,000
Less allowance for doubtful debts	(2,850)
Net receivables (current asset)	54,150

The income statement is charged $3\,000 + 850 = \$ 3,850$ (the write-off plus the increase in the allowance).

Examples in context

Example 1. A customer goes bankrupt. A trader is owed $\$ 1,500 $by a customer who becomes insolvent. The debt is written off:$ \ $1,500$ goes to the income statement as an expense and the receivable is removed. The loss is recognised in the year it became certain, matching it to the period, rather than leaving a worthless asset on the books.

Example 2. Prudent estimating, year on year. A firm keeps an allowance at $3\%$ of receivables. As receivables grow from $\$ 40,000 $to$ \ $50,000$ , the allowance rises from $\$ 1,200 $to$ \ $1,500$ . Only the $\$ 300$ increase is charged this year. The allowance keeps net receivables realistic without overstating the expense each period.

Try this

Q1. State the double entry to write off an irrecoverable debt of $\$ 800$ owed by a customer, Lim. [2 marks]

Cue. Debit Irrecoverable debts $\$ 800 $; Credit Lim (trade receivable)$ \ $800$ .

Q2. Receivables after write-offs are $\$ 30,000 $and the allowance is set at$ 5%$. State the allowance and the net receivables. [2 marks]

Cue. Allowance $= 5\% \times 30\,000 = \$ 1,500 $; net receivables$ = 30,000 - 1,500 = \ $28\,500$ .

Q3. The allowance rises from $\$ 1,000 $to$ \ $1,400$ . State the amount charged to the income statement and why. [2 marks]

Cue. Only the $\$ 400$ increase is charged, because the allowance is carried forward and just the change in it affects profit.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original7 marksAt 31 December, trade receivables were

\

42\,000

before any adjustments. A debt of

2\,000

owed by Pang is to be written off as irrecoverable. The business then wishes to create an allowance for doubtful debts of

5\%

of remaining receivables. (a) Show the entries to write off the debt. (b) Calculate the allowance. (c) State the net receivables shown in the statement of financial position.

Show worked answer →

(a) Write off Pang's debt: Debit Irrecoverable debts $\$ 2,000 $(an expense); Credit Pang (trade receivable)$ \ $2\,000$ . Pang's account closes.

(b) Receivables after the write-off $= 42\,000 - 2\,000 = \$ 40,000 $. Allowance$ = 5% \times 40,000 = \ $2\,000$ . The double entry to create it: Debit Irrecoverable debts (or Allowance expense) $\$ 2,000 $; Credit Allowance for doubtful debts$ \ $2\,000$ .

Markers reward the write-off entry, receivables reduced to $\$ 40,000 $, a$ \ $2\,000$ allowance, and net receivables of $\$ 38,000$.

Original6 marksLast year a business had an allowance for doubtful debts of

\

1\,500

. This year, after writing off bad debts, receivables are

50\,000

and the allowance is to be

4\%

of receivables. (a) Calculate the new allowance. (b) State the change in the allowance and how it affects the income statement this year.

Show worked answer →

(a) New allowance $= 4\% \times 50\,000 = \$ 2,000$.

(b) The allowance rises from $\$ 1,500 $to$ \ $2\,000$ , an increase of $\$ 500 $. Only the **change** affects the income statement: the$ \ $500$ increase is charged as an expense this year (Debit Irrecoverable debts/allowance expense $\$ 500 $; Credit Allowance for doubtful debts$ \ $500$ ).

Had the allowance fallen, the decrease would have been credited to the income statement as a reduction in expense (or other income).

Markers reward the $\$ 2,000 $new allowance, recognising that only the$ \ $500$ increase is charged, and the correct treatment of an increase as an expense.