Glossary · Also called Bad debt
Irrecoverable debt
Money owed by a customer that the business has decided it will not be able to collect.
What it means
A trade receivable considered uncollectible and written off as an expense.
Example
If a customer who owes RM400 goes out of business, the RM400 is written off as an irrecoverable debt.
Why it matters
Writing it off keeps trade receivables realistic and recognises the loss as an expense.
In practice
When a debt is judged uncollectable, the business writes it off. It debits an irrecoverable debts account (an expense in the income statement) and credits the customer's account in the sales ledger. The customer is no longer a trade receivable in the statement of financial position.
Imagine a customer owes RM800 and has gone out of business. The RM800 leaves trade receivables and becomes an expense that reduces profit for the year. If the customer later pays, the recovery is treated as a separate small income item.
Students often confuse an irrecoverable debt with an allowance (provision) for doubtful debts. An irrecoverable debt is a specific amount that is definitely lost, so it is removed entirely. An allowance is a cautious estimate against receivables that might not pay. It does not delete any particular customer's balance.
If these two adjustments are hard to tell apart in an exam, one of our teachers can go through typical questions with you. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.4 Irrecoverable debts and allowance for irrecoverable debts (page 15).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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