Accounting for Bad Debts
Bad Debts is a type of expense which occurs due to Customer’s inability to pay back the amount outstanding invoices reflect, in such cases, when there is a sincere or reasonable belief that it cannot be recovered, it is considered to be a good practice to write-off the amount due.
It is treated as a business loss, which could have been the income is now treated as an expense and transferred to write-off account under Expense accounts.
Consider an example where Frank has an outstanding invoice of $200, he has gone out of business and won’t be able to clear it.
To write-off, follow the steps below:
- Create Journal Entry of type Write-Off Entry.
- Select Write Off account to debit and Debtors to credit.
- Select Party Type as Customer with Frank as Party.
- Choose Reference Type & Reference Invoice you want to write off (expand the Debtor's row and scroll down to Reference section).
Once the balance is written off, the amount will be booked as an expense and outstanding against Frank will start reflecting 0.
In future, if Frank becomes eligible to clear his dues later or in the next year, create a reverse journal entry to remove Frank from write-off account to adjust it with the payment received.