A bad debt is a debt which is not expected to be prepaid.
Customers who buy goods on credit might fail to pay for them, perhaps out of dishonesty or perhaps because they have gone bankrupt and cannot pay. For one or another, a business might decide to give up expecting payment and to write the debt off.
When a business decides that a particular debt is unlikely ever to be repaid, the amount of the debt should be written off as an expense in the profit and loss account. However bad debts written off are accounted for as follows,
- Sales are shown at their invoice value in the trading account. The sale has been made and gross profit should be earned. The subsequent failure to collect the debt is a separate matter, which is reported in the profit and loss account.
- Bad debts written off are shown as an expense in the profit and loss account.
- If bad debts written off and subsequently paid, the amount recovered should be recorded as additional income in the profit and loss account of the period in which the payment is received.
- Accounting bad debts
Bad Debts account (Debit)
Debtors account (Credit)
- Writing off bad debts
Profit and loss account (Debit)
Bad Debts account (Credit)
- bad debts written off and subsequently paid
Cash account (Debit)
Bad debts received (Credit)
- Recorded bad debts written off and subsequently paid as additional income in the profit and loss account.
Bad debts received (Debit)
Profit and loss account (Credit)