Bad debt accounting

If a business is faced with a situation where it is highly unlikely that the amount owing by a customer will be received, then the debt is known as a bad debt. So a bad debt is a debt which is uncollectable.

If a debt is considered to be uncollectable then it would be prudent to remove it totally from the accounts and to charge the amount as an expense to the income statement. The original sale remains in the accounts as this did actually take place. The debt is removed as it is considered that the debt will never be paid and an expense is charged to the income statement for bad debts.

The bad debt in accounting shows the double entry:

Example

Aspring have total accounts receivable at the end of their accounting period of $45,000. Mr A who owes $790, has been declared bankrupt, and another who gave his name as B has totally disappeared owing Aspring $1,240.

Step1

Enter the opening balance in the accounts receivable account.

Step2

As the two debt are considered to be irrecoverable, they must be removed from accounts receivable by a credit entry and a corresponding debit entry to a bad debts expense account.

Step3

The account receivable account must now be balanced and the closing balance would appear in the balance sheet as the accounts receivable figure at the end of the period.

$42,970 would appear in the balance sheet as the figure for accounts receivable under current assets at the end of the accounting period.

Step4

Finally, the bad debts in the balance sheet as the figure for accounts receivable under current assets at the end of the accountng period.

Related posts:

1. Bad debt entry
2. The difference between a bad debt written off and a doubtful debt allowance
3. Bad debt in the income statement
4. Allowance for doubtful debt
5. Bad debts recovery