Hi Rafal
There is often confusion around the account names and because of that, I think, then confusion as to where the accounts sit (P&L or BS) and then how to adjust for them.

The words irrecoverable and bad are interchangeable.

The part that causes the confusion - you will see an Allowance for doubtful debt account (an expense account) in the P&L and an Allowance for Doutbful Debt Account in the BS (This account sits in the same section as your receivables account). To make it easier add the word 'adjustment' to the P&L account in your notes or the word 'expense' after it or even PL after the former and BS after the latter. Makes it easier when practising questions and helps it to make more sense.

When an customer debt is bad/you know you will not be paid and you know the customer you will write it off to the expense account - so debit 'Bad debt/irrecoverable debt' expense account (and credit the receivables/SLCA).

Businesses that have been around for a while also tend to know they will never always get paid everything they are owed so must ONLY show the receivables that they consider they are likely to receive. So they make a 'provision' or allowance for the likelihood of having something go bad. The reason they do not write this off as above, is because they do not know which invoice nor which customer is likely to go bad, just that historically a set % has gone bad, so they 'provide' for ie set aside, an amount to cover this possibility. This is an example of the 'prudence concept' used in Accounting.

There is a set order for making the calculations
SLCA balance at start
Step 1 - adjust (reduce) for any bad debts (gone bad/know which customer/which invoice)
Step 2 - adjust (reduce) for specific allowance (eg you may have an invoice that is 4 months old and looking unlikely to be paid, but the customer hasnt gone bad yet)
Step 3 - adjust (reduce or increase) for the general allowance, ie the % the company is used to seeing based on past history.

The entries for the steps 2 and 3 are the provisions run through the 'allowance for DD debts' accounts - one in the P&L and one in the BS.

So in your example
SLCA is £38,600 at the start.
You know you had one debt that has gone fully bad £1600.

So adjust for this
Debit bad/irrecoverable debts (expense) £1600
                                   Credit SLCA £1600

So now your SLCA balance is £37,000.

You need to make a provision for this year of 2% of the revised SLCA figure = £740.

If this was their very 1st provision you would
Debit Allowance for  DD ADJ (expense) £700
                               Credit  Allowance for DD (BS) £700.     

So your net receivables is £36,300.       

BUT note - this is NOT their 1st adjustment.   They did a similar exercise last year so already have a CREDIT balance on their  irrecoverable DD (BS) account of £900.

SO, what you need to do is reduce this account from a provision of £900 to one of £740.  IE REDUCE the Allowance for DD on the BS by £160.

To reduce a CREDIT balance, you need to DEBIT it.

SO...debit Allowance for  DD (BS) account  160  

                 credit irrecoverable DD  ADJ (PL) account  £160    (Yes in this case you are increasing profit, rather than reducing it).

To recap....all entries

Debit bad debt expense  £1600

Credit SLCA  £1600

Credit allowance for doubtful debts expense £160

Debit allowance for doubtful debts  (BS)  £160

In your model answer they have combined the impact on the EXPENSES account of the debit for £1600 and credit for £160 - so showing an overall Debit of £1440.   

To practice, break it down, for the answer, lump it together.

HTH