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|
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.
|1/7/2016||Bad Debts A/c ……………..Dr||15000|
|To, Debtors A ( by name)||7500|
|To, Debtors B||4000|
|To, Debtor C||3500|
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.
|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|
|Opening Stock||xxxx||By sales||xxxx|
|Gross profit c/d||xxxx|
|By gross profit b/d||xxxx|
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.
|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|
|Plant & Machinery||xxxx|
Hope the above explanation is clear for you. Leave a comment in case of any doubts.