Writing Off Bad Debts
With many businesses a large proportion, if not all, of the sales are on credit. The business is therefore taking the risk that
some of the customers may never pay for the goods sold to them on credit. This is a normal business risk and such bad debts
are a normal business expense. They must be charged to the profit and loss as an expense when calculating the profit and loss
for the period. The other thing that needs to be done, is to remove the bad debt from the asset account. Usually
this will mean closing the debtors account, but not always.
There is a range of possible scenarios that may exist concerning a bad debt.
- The debtor may be refusing to pay one of a number of invoices
- The debtor may be refusing to pay part of an invoice
- The debtor may owe payment on a number of invoices and has indicated that only a proportion of the total amount due will ever be paid
because the debtor's business has failed
- The debtor's business has failed and nothing is ever likely to be received
Whatever the reason, once a debt has been declared 'bad', the journal entry is the same. You debit the bad debt
account with the amount of the bad debt and credit the debtor's account in the Sales Ledger Control Account (SLCA).
When a debt is deemed to be 'bad', the asset as shown by the debt in the debtor's account is worthless. It must be
eliminated from the account.
This is done as follows: -
DR - Bad debts expense account
CR – Debtors Account - (Within Sales Ledger Control Account)
Crediting the Debtor's Account will cancel the asset, and debiting the Bad Debt Account will increase the expense
to the business.
At the end of the period, the total of the bad debts account is transferred to the profit and loss account.
Bad Debt Tax (VAT)
Businesses which operate within the EU and VAT registered may be able to claim VAT bad debt relief.
Accounting Information - Home Page
| 
