Accounting Online Program Certification Practice Test

What amount should Urb plc charge or credit for irrecoverable debts in the statement of profit or loss for the year ended 31 December 20X1?

1. £100 debit

2. £100 credit

3. £3,600 debit

4. £3,600 credit

The correct answer is: £100 credit

In accounting, irrecoverable debts, often referred to as bad debts, represent amounts owed to a business that are deemed uncollectible. When recording irrecoverable debts, a business typically recognizes them as an expense on the statement of profit or loss. If the company expects to recover these debts in the future, it would not classify the amounts as irrecoverable. In this case, to determine the amount Urb plc should charge or credit for irrecoverable debts, it is critical to ensure that the value reflects the company’s assessment of the collectability of those debts. Charging £100 credit indicates that previously reported debts that are unlikely to be collected have been written off against income, adjusting the profit accordingly. This write-off effectively reduces the income, acknowledging the likelihood that the amount is not recoverable, and it correctly reflects the financial position of the company in terms of realizable assets. The other amounts suggested do not appropriately reflect the treatment of irrecoverable debts, as £100 debit would imply an expense incurred that doesn't correlate with the general practice of recognizing irrecoverable debts, while both £3,600 debit and £3,600 credit do not match the expected amount that typically corresponds to smaller transactions or write-offs typically seen