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Bad debts and its accounting treatment

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Many business offer credit facility to its customers in order to overcome the competition and increase its sale and there by revenue. Giving credit to its customers often leads to a negative result such as non payment of dues from customers.After lot of efforts to collect the outstanding amount from customers business will get to know that some debts are irrecoverable.

The failure to collect amounts due from trade debtors result in an expense that is known as bad debts.When it becomes quite sure that a certain debts is irrecoverable the amount is usually written off the sundry debtors.The loss on account of bad debts is debited to profit and loss account and sundry debtors are shown in the balance sheet at net figure after deducting bad debts

Accounting treatment of bad debts

In trail balance bad debts are shown on the debit side as it is an expense to the company.

TRAIL BALANCE AS ON 31-03-2017
Particulars  Debit  Credit
Sundry debtors 250000
Bad Debts 15000

Bad debts in journal book or journalise bad debts

The adjusting entry: Bad debts Adjusting entry are those entries in which the irrecoverable debts are adjusted as expense or to be written off. see the example below.

JOURNAL
Date Particulars JF Debit Creidt
1/7/2016 Bad Debts A/c ……………..Dr 15000
   To, Debtors A ( by name) 7500
   To, Debtors B 4000
   To, Debtor C 3500

Closing entry

The closing entry to close the bad debts account and transfer the expense to profit and loss account. In today’s computerized accounting there is no importance for closing entry as expenses are automatically posted to profit and loss account as on the report date.

JOURNAL
Date Particulars JF Debit Creidt
1/7/2016 Profit & Loss A/c ……………..Dr 15000
   To, Bad debts A/c 15000

Bad debts in Profit & Loss account

Bad debts are shown on the debit side or expense side of the profit and loss account.It is treated as indirect expense. Bad debts reduces the net profit of the business.

Profit And Loss Account as on 31-03-2017
Expense Amount Income Amount
Opening Stock xxxx By sales xxxx
Purchase xxxx closing Stock xxxx
Carriage xxxx
Manufacturing Wages
Gross profit c/d xxxx
xxxx xxxx
By gross profit b/d xxxx
Rent xxxx Discount received xxxx
Office salary xxxx
Electricity xxxx
Bad debts 15000
Net Profit xxxx
xxxx xxxx

Balance Sheet.

And Finally in the balance sheet.The debtor balance is reduced automatically and the balance amount of sundry debtors are shown on the asset side of balance sheet.

For understanding purpose only showing sundry debtors after deducting bad debts.

Balance Sheet
Liabilities Amount Asset Amount
Sundry Creditors xxxx Cash at bank xxxx
Outstanding expense xxxx Cash in hand xxxx
Capial Account xxxx Sundry Debtors         200000

(before adjusting bad debts)

   Less bad debts          15000 185000
Motor vehicles xxxx
Plant & Machinery xxxx
xxxx xxxx

Hope the above explanation is clear for you. Leave a comment in case of any doubts.

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