Bad debt

Bad debt

Bad debts arise when a trade receivable (credit customer) is unable or unwilling to pay the amount owed in respect of goods sold on credit

• a business may have to write off debt as a bad debt

• bad debts are an expense and will reduce the profit of the business

• Company has to pay. Debt is written off if they are 100% sure they will not get the money back

Why might a debt be irrecoverable

the credit customer cannot be traced, not worth taking to court, been declared bankrupy

ledger entries for bad debts

• trade recievables’ amount reduces

• expense - bad debt written off: increases

doubtful debt vs bad debt

doubtful debt - money you predict will be uncollectible and turn in to bad debt

bad debt - debt you have officially written off as a uncollectible

types of provisions for doubtful debts

specific provision - in respect of particular trade receivables (credit customers) that have been identified as unlikely to pay their debts

general provision representing an estimate, usually computed as a percentage of the trade receivables at the end of the accounting year who are unlikely to pay their debts

• the level of a general provision should reflect past experience of loss on debts where there was insufficient data to indicate the need for a specific provision

• together they reduce value of debts expected to be recieved

ledger entries for a provision for doubtful debts

To create of increase a provision: increase expense: charged to selling and distribution costs, increase provision for doubtful debts

Decrease in provision: decrease expense: charged to selling and distribution costs. decrease provision for doubtful debts

• the balance on the provision for doubtful debts account is deducted from trade recievables in the statement of financial position to show net trade receivables