Accounting for Bad Debts

Accounting for Bad Debts

Bad Debts is a type of expense that arises as a result of a customer's inability to repay the amount reflected on outstanding invoices. When there is a sincere or reasonable belief that the debt cannot be recovered, it is standard practice to write off the amount owed.

It is treated as a business loss, which could have been a source of income, and is transferred to the write-off account under Expense accounts.

Consider the scenario in which Frank has a $200 unpaid invoice but has gone out of business and cannot pay it.

To write off, follow the below steps:

1.Create a Write-Off Entry journal entry.

2.Select Write Off account as the debit account and Debtors as the credit account.

3.Select Customer as the Party Type with Frank as the party.

4.Select the Reference Type and Reference Invoice to be written off (expand the Debtor's row and scroll down to the Reference section).

Once the balance is written off, the amount will be recorded as an expense and Frank's account will reflect a zero balance.

If Frank becomes eligible to clear his dues in the future or the following year, create a reverse journal entry to remove him from the write-off account and adjust it with the payment received.