Thanks again.
How would you record bad debt write off from the previous year ?
I have several sales invoices from previous years and I need to get rid of them.
Please do not add unrelated questions to a topic. This one has been moved to its own topic.
Read the Guide: Write off bad debts | Manager.
I recommend searching the Guides before asking questions on the forum. See Search the Guides | Manager.
@Tut,
Hi Tut, You refer to guide 14465 how to deal with bad debts. This brought me to the idea to read this guide and I think it is incomplete.
A very common practice in accounting is that when you expect a certain invoice to be a bad debt, or a percentage of you total outstanding invoices to be bad debts, that you create a provision for bad debts. Later on when a specific debt is indeed a bad debt, you debit the provision and credit the debtor for the unpaid invoice.
An example
30-12-2019
Bad debts (expense account on the P/L Debit 5000
Provision for bad debts balance account Credit 5000
31-08-2020
Customer A goes bankrupt Unpaid invoice is 1210 including 210 VAT
Journal entry:
Provison for bad debts Debit 1210
Debtor A Credit 1210
With this journal entry, you expect that you have to debit the provision account for 1000 but that’s not the case. You have to enter 1210, next you choose 21% VAT and finally the name of the debtor.
Can you please take care or take action that the guide is updated with this common practice.
Thanks and kind regards.
@Hennie, I think your suggestion would make the Guide too complex. To begin with, the Guide is about how to write off bad debts, not about how to create contingency reserves for uncertain future events. I am well aware that some accountants make such contingency provisions. In some cases, the nature of a business demands that, because bad debts are common. But a Provision for bad debts asset account merely introduces an additional step into the process.
You will notice the Guide’s instruction for writing off the debt already says, “Debit the Bad debts account by the amount being written off. Credit the asset account where the bad debt is recorded [emphasis added] by the same amount.” If you want to include an intermediate stop in a Provision for bad debts account between Accounts receivable and Bad debts, you can. You would just credit Provision for bad debts instead of Accounts receivable at the write-off step.
Taking things to absurd limits, you could make your entire scheme chronological, progressing from Debts likely to be written off in three years to Debts likely to be written off in two years to Debts to be written off this year. But that is effectively reproducing aspects of your Aged Receivables report.
Of course, an accountant’s preference for how to treat bad debts will also depend on required reporting, local standards, and how often financial statements are prepared and audited. Publicly traded companies are more likely to use provision accounts than sole traders. Likewise for businesses that prefer to make all adjustments at year-end.
My assessment about this is that any accountant or bookkeeper sophisticated enough to want to temporarily put debts into a provision account before ultimately writing them off would be able to figure out how to do that on their own. The Guides are typically targeted at less experienced users. In the case of bad debts, the question is usually as simple as “How do I get rid of this since I am not going to be paid?” The Guide tells them in a straightforward way how to do that. I do not recall ever seeing a question about how to transfer a questionable debt into a provisional contingency account.
As for the tax issues, I think they are also covered in the section titled Adjust taxes, complete with examples.
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Do you need to move the bad debt into the “Bad Debt” account?