Accounting - Bad debts

Bad debts

Bad debts derive from debtors have been identified by management as
being unable to pay outstanding debts. Once management determines that
certain debtors are not going to pay the asset debtors is reduced and the
expense bad debts is recognised.

In the general journal this would be shown as:

DATE
ACCOUNT
DEBIT
CREDIT

15 Nov.
Bad debts
450

Debtors

450

Debtors account written off as not recoverable

Bad debts will be shown as a financial expense in the Profit and Loss
statement.

Bad debts may well be assessed in the context of control accounts or
separately. You must be able to separate the treatment of bad debts,
firstly when the bad debt occurs in the same period as the credit sale, and
secondly, when the bad debt happens in the later period.

Doubtful debts are an estimate of the amount not likely to be recovered
from debtors. It is general and not linked to any specific debtor. It is
allowed for by a business in order to try to match the expense associated
with a revenue (credit sale) in the same reporting period in which the
revenue was earned. Doubtful debts are the anticipation of bad debts.

Previous | Next