Accounting treatment for Bad debt | Professional Utilities

BAD DEBTS WRITTEN OFF

Bad debt: The amount which is not recoverable from debtors is called as Bad debt. It is also termed as an Uncollectible amount. Bad debt is a total loss to the firm, and it records on the debit side of the income statement.

 

Table Of Content

Methods of Accounting treatment for Bad debts

 

Accounting for bad debts is two methods, such as:

1. Allowances method

In this method, first, we need to estimate the uncollectible (doubtful debt) receivables. This estimation procedure will depend on the respective company. For example, some companies consider the percentage of sales, some companies consider the percentage of receivables, etc. Then, Bad debts expense is recognized before the debt actually becomes un-collectible. The adjusting entry at the end of an accounting period to recognize estimated bad debts expense. Thus, a provision account called “Allowances for doubtful account” is created. The below-adjusting entry which is having hypothetical values as under is for example.

Dr. Bad debts expense A/c (Expenses – P/L) 20,000

Cr. Allowance for doubtful debt (Receivables – Asset) 20,000

The Allowance for doubtful debt is a contra asset A/c which will be displayed on the balance sheet by subtracting it from Accounts receivable (debtors). For example, the debtor’s value was 1,50,000 before passing the above entry, then Debtors’s balance will be shown as Rs1,30,000 after recorded the above entry. In the next period, when a debt is actually determined as uncollectible for 5,000, the below written off journal entry has to record.

Dr. Allowance for doubtful debt (Receivables – Asset) 5,000

Cr. Debtor A/c (Accounts receivable – asset) 5,000

As more and more debts are written off, the balance in the “Allowance for doubtful debt” will decrease.

If any bad debt is recovered, then, two journal entries should pass as below.

(a) Reverse the write off the entry as (assume for Rs 3,000):-

Dr. Debtor A/c (Accounts receivable – asset) 3,000

Cr. Allowance for doubtful debt (Receivables – Asset) 3,000

(b) record the receipt entry as below:-

2. Direct written off method

In this method, we can directly written off bad debts, and no involvement of contra-asset A/c i.e. “Allowance for doubtful debt”.

 

Bottom line

 

We can use the Direct written-off method for small amounts, whereas the Allowances method for huge amounts.