Impairment and Bad Debts — Accounting Entries
Learn how to account for doubtful customer balances, expected credit losses,
bad-debt write-offs, recoveries, and impairment of business assets.
Understand when to recognise an estimated loss and when to remove an
uncollectible balance from the books.
An expected credit loss allowance estimates credit losses on relevant
financial assets. A write-off removes an amount when there is no reasonable
expectation of recovery, subject to the applicable accounting framework.
Asset impairment is a separate process governed by the relevant asset
accounting standard. The examples exclude tax entries.
1. Recognise an expected credit loss allowance
Situation: A business has customer receivables of ₹5,00,000. Based on its assessment, it estimates expected credit losses of ₹25,000 that have not previously been recognised.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Expected Credit Loss Expense | 25,000 | — |
| Allowance for Expected Credit Losses | — | 25,000 |
Why this entry? The business estimates that some of its receivables may not be collected.
Accounting logic: Recognise the estimated loss in profit or loss and establish a contra-asset allowance that reduces the net carrying amount of receivables.
Important: The assessment method depends on the applicable framework. IFRS 9, for example, contains expected-credit-loss requirements for financial assets within its scope.
2. Increase an existing expected credit loss allowance
Situation: The business has an existing allowance of ₹25,000. A new assessment indicates that the required closing allowance is ₹40,000.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Expected Credit Loss Expense | 15,000 | — |
| Allowance for Expected Credit Losses | — | 15,000 |
Why this entry? The required allowance has increased by ₹15,000.
Accounting logic: Record the change needed to bring the existing allowance to the required closing balance. Do not expense the entire ₹40,000 again.
3. Reduce an excessive expected credit loss allowance
Situation: The existing allowance is ₹40,000. Updated evidence indicates that the required closing allowance is now ₹30,000.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Allowance for Expected Credit Losses | 10,000 | — |
| Reversal of Expected Credit Loss Expense | — | 10,000 |
Why this entry? The updated estimate indicates that the previously recognised allowance is higher than required.
Accounting logic: Reduce the allowance to the required closing balance and recognise the corresponding reversal when permitted by the applicable framework.
4. Write off a customer balance against an existing allowance
Situation: A customer owes ₹20,000. The amount is determined to be uncollectible, and the business has already recognised sufficient allowance for this balance.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Allowance for Expected Credit Losses | 20,000 | — |
| Accounts Receivable | — | 20,000 |
Why this entry? The business removes the uncollectible receivable using the allowance already established.
Accounting logic: Reduce both gross receivables and the allowance. If the loss has already been provided for, do not recognise the same loss again.
5. Write off a bad debt when no allowance exists
Situation: A customer balance of ₹12,000 is determined to be uncollectible. No allowance has previously been recognised for this balance, and the applicable accounting requirements permit direct recognition of the loss.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bad Debt Expense / Credit Loss Expense | 12,000 | — |
| Accounts Receivable | — | 12,000 |
Why this entry? The business removes a receivable that it does not expect to collect.
Accounting logic: Recognise the loss and reduce receivables when the accounting requirements for write-off are met.
Important: Where an expected credit loss allowance model applies, the allowance should generally be considered before recording a direct write-off.
6. Recover a customer balance previously written off
Situation: A customer pays ₹5,000 toward a balance that was previously written off. Assume the business uses a method of reinstating the receivable before recording the receipt.
Step 1: Reinstate the receivable
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Receivable | 5,000 | — |
| Bad Debt Recovery / Credit Loss Reversal | — | 5,000 |
Step 2: Record the cash receipt
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank Account | 5,000 | — |
| Accounts Receivable | — | 5,000 |
Why these entries? The first entry reinstates the recovered balance, and the second records the receipt.
Accounting logic: The net result is a bank increase and recognition of the recovery. Follow the entity’s established accounting policy and applicable framework for recoveries.
7. Recognise impairment of a fixed asset
Situation: A machine has a carrying amount of ₹8,00,000. An impairment assessment under the applicable asset standard determines that its recoverable amount is ₹6,50,000. No previous impairment loss has been recognised.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Asset Impairment Loss | 1,50,000 | — |
| Accumulated Impairment / Machine Account | — | 1,50,000 |
Why this entry? The machine’s carrying amount exceeds its recoverable amount by ₹1,50,000.
Accounting logic: Recognise the impairment loss and reduce the asset’s carrying amount as required by the applicable standard.
Important: IAS 36 applies to impairment of assets within its scope. Other assets, including some financial assets and inventories, are subject to different standards.
8. Reverse an impairment loss when permitted
Situation: A machine previously suffered an impairment loss. A later assessment indicates that its recoverable amount has increased, and a reversal of ₹40,000 is permitted under the applicable standard. The reversal does not exceed the carrying amount that would have existed without the earlier impairment.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Accumulated Impairment / Machine Account | 40,000 | — |
| Reversal of Impairment Loss | — | 40,000 |
Why this entry? The recoverable amount has increased and the applicable standard permits a partial reversal.
Accounting logic: Increase the asset’s carrying amount and recognise the reversal in accordance with the relevant standard.
Important: Under IAS 36, impairment losses on goodwill are not reversed. Reversals for other assets are subject to limits and specific requirements.
9. Recognise impairment of inventory
Situation: Inventory has a cost of ₹1,00,000. Its net realisable value has fallen to ₹75,000, and the applicable inventory standard requires measurement at the lower amount.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Inventory Write-down Expense | 25,000 | — |
| Inventory / Inventory Write-down Allowance | — | 25,000 |
Why this entry? The inventory can no longer be recovered through sale at an amount equal to its original cost.
Accounting logic: Reduce the inventory carrying amount to net realisable value when required by the applicable standard.
Important: Inventory write-downs are addressed by IAS 2 under IFRS. Do not automatically apply the IAS 36 impairment model to inventory.
10. Recognise an increase in an allowance after customer risk changes
Situation: A customer owes ₹2,00,000. New information about the customer’s financial difficulty changes the estimated required allowance from ₹10,000 to ₹35,000.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Expected Credit Loss Expense | 25,000 | — |
| Allowance for Expected Credit Losses | — | 25,000 |
Why this entry? Updated customer information indicates a higher expected credit loss.
Accounting logic: Adjust the allowance from ₹10,000 to the required closing balance of ₹35,000, recognising only the ₹25,000 increase.
Important: The estimate should reflect the relevant model, forward-looking information, historical experience, and other evidence required by the applicable framework.
Impairment and bad-debt checklist
- Review receivables for overdue balances and indicators of credit deterioration.
- Assess whether an expected credit loss allowance is required.
- Recalculate the required allowance at the reporting date.
- Write off balances when the applicable write-off criteria are met.
- Do not expense a balance twice when an allowance already covers it.
- Record recoveries using a consistent accounting policy.
- Assess fixed assets for impairment indicators and apply the relevant standard.
- Review inventory for write-downs under the applicable inventory standard.
- Document assumptions, supporting evidence, approvals, and calculations.
- Distinguish financial-asset credit losses from impairment of non-financial assets.
An allowance is an estimate of expected loss, while a write-off removes a
receivable when the applicable criteria are met. Impairment of fixed assets
and inventory follows separate accounting requirements. These treatments
should not be combined into one generic impairment rule.