Bad debts vs doubtful debts: writing off vs allowing for a loss

Two terms in IGCSE Accounting are easy to mix up: the bad debt and the doubtful debt. Both involve customers who owe money, and both reduce profit. But they describe different situations.

A bad debt is a loss that has already happened. A doubtful debt is a loss that might happen, and may never happen at all. The accounts record them differently because the timing and certainty differ.

Why the two get confused

“Bad” and “doubtful” both sound negative, so students treat a doubtful debt as a bad debt that has not quite gone bad yet. That is the misconception at the heart of this topic.

They are not points on one scale. One deals in fact and the other in forecast.

A bad debt is a loss that has already happened

A bad debt, which the syllabus also calls an irrecoverable debt, is money a named customer owes and will not pay. Something definite has happened: the customer has gone into liquidation, disappeared or cannot be pursued.

Suppose a customer owes RM1,200 and the business learns that the customer’s firm has closed for good. That RM1,200 is not doubtful. It is gone.

The business removes the debt from receivables and records it as an expense of the period. Writing it off recognises a loss already suffered.

A doubtful debt is a loss that might still happen

A doubtful debt is different. The business is not pointing at a customer who has failed to pay.

It looks at everyone who still owes money and accepts that, from experience, some will probably not pay. It cannot say which ones, and every one of those debts may still be paid in full.

This is a risk, not an event. Prudence asks the business to make a sensible estimate, perhaps a small percentage of the total owed. It sets this aside as a provision (also called an allowance) for doubtful debts.

Certain and specific versus estimated and general

A bad debt is certain and specific: a known amount, owed by a known customer, already lost. A provision for doubtful debts is estimated and general: an approximate figure spread across customers who cannot be named, covering a possible future loss.

One is history and the other is a forecast. A doubtful debt does not become a bad debt just by getting older. If a debt is later confirmed as unpayable, it is written off as a bad debt in its own right.

How they are recorded

Writing off a bad debt removes that customer’s balance completely. The amount becomes an expense charged in full against the period’s profit.

A provision does not touch any individual balance. It is deducted from total receivables, which lowers the value at which they are shown. The debts are still legally owed, but the accounts do not count on collecting every ringgit.

One entry deletes an asset. The other reduces its value.

How they are adjusted in later years

A written-off debt is finished business. It has left the accounts.

If the customer later pays after all, that is a new event called a bad debt recovered. It is recorded as income when the money arrives.

The provision works the other way. It is an estimate, so it is reviewed each year and only the change is charged or credited.

If last year’s provision was RM1,000 and this year RM1,200 seems right, only the RM200 increase goes through this year’s income statement. The RM1,000 was already charged.

If the required provision falls, the reduction is written back as a small gain. A write-off is a single event. A provision is a running estimate that moves up and down.

Which comes first

First, write off the debts you now know are irrecoverable. Then estimate the provision on the receivables that remain.

Estimating a future loss on a debt that is already lost would count the same loss twice. Certain losses first and uncertain ones second means each loss is recognised once.

Reading both in the accounts

In the income statement, bad debts written off appear in full as an expense. The movement in the provision appears separately, as an increase charged or a decrease written back.

In the statement of financial position, written-off debts have gone from receivables. The provision is deducted from the remaining receivables, giving the net amount the business realistically expects to collect.

If your child can define both terms but still lets a doubtful debt slip into a write-off, one of our teachers can go through worked examples with them. The same goes for charging the whole provision instead of its movement. Book a trial class and bring the receivables question that keeps causing trouble.

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.4 Irrecoverable debts and allowance for irrecoverable debts (page 15).