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Bad Debts

Where there are credit sales, bad debts are bound to happen, and most of the businesses conduct their sales on a credit basis. Bad debts are amounts that customers are unlikely to pay for the goods sold to them on credit. Bad debts are inevitable business risks and are treated as a normal expense item in an accounting period.

There are various reasons that debts due to a business are unlikely to be collected. The cost incurred in pursuing in the recovery of a debt may be higher than the amount owed, the debtor may simply disappear, or the debtor has declared bankruptcy in which case a one-off payment not necessarily the full amount of the debt may be secured from the liquidation.

Bad debts are a loss to a firm and are written off as an expense item on the income statement in the period in which they are incurred. Failure to allow for bad debts causes the profit level to be higher than it should rightly be, the firm to pay more tax that it should, and to display an unrealistic figure for the current asset of debtors on the balance sheet, which is a very important statement as different parties rely on it to make decisions.


Posting to ledgers

  • The bad debt is written off as follow:

Debit bad debts account
Credit debtor's account

An example of a bad debt being written off:

The general journal

Date Particulars Folio Dr Cr
$ $
20XX
Aug 31 Bad debts 160
B Bumblebee 160
(The writing off of bad debt)


General Ledger

Bad Debts Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX
Aug 31
B Bumblebee 160


Sales/Debtors Ledger

B Bumblebee Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX 20XX
Feb 9 Sales 160 Aug 31 Bad debts 160


  • Sometimes, a debtor could manage to pay only part of the debt. The remainder of the debt is treated as a bad debt and is written off as such. The entries in the accounts are:

Debit bad debts account
Credit debtor's account

An example of part payment of a debt and the remainder written off as a bad debt:

The general journal

Date Particulars Folio Dr Cr
$ $
20XX
Sep 30 Bad debts 70
B Bobtail 70
(The writing off of bad debt)


General Ledger

Bad Debts Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX
Sep 30
B Bobtail 70


Sales/Debtors Ledger

B Bobtail Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX 20XX
Feb 9 Sales 170 Mar 21 Cash
100
Sep 30 Bad debts 70
170 170


  • It is possible for a debt considered bad and written off previously to be recovered subsequently. In such a case, two sets of entries are made in the accounts, the first of which is to restore the debtor's account.

Debit debtor's account
Credit bad debts account*

Debit cash/bank account
Credit debtor's account

*The credit balance in the bad debts account is transferred to the credit side of the profit and loss account.

An example of a bad debt written off but recovered later:

The general journal

Date Particulars Folio Dr Cr
$ $
20XX
Sep 16 B Bellbirdy
220
Bad debts 220
(To restore debtor's account)
><
20XX
Sep 16 Cash 220
B Bellbirdy 220
(Payment received for bad
debt previously written off)


General Ledger

Bad Debts Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX 20XX
Jul 31
B Bellbirdy 220 Sep 16 B Bellbirdy 220


Cash Account

Date Particulars Folio Amount Date Particulars Folio Amount
$
20XX
Sep 16
B Bellbirdy 220


Sales/Debtors Ledger

B Bellbirdy Account

Date Particulars Folio Amount Date Particulars Folio Amount
$ $
20XX 20XX
Jan 13
Sales 220 Jul 31
Bad debt
220
Sep 16 Bad debt 220 Sep 16 Cash 220




Last Updated (Saturday, 04 September 2010 09:07)