Bad debt write off accounting journal entry
Bad Debts An entity may not be able to recover its balances outstanding in respect of certain receivables.
In accountancy we refer to such receivables as Irrecoverable Debts or Bad Debts. Bad debts could arise for a number of reasons such as customer going bankrupt, trade dispute or fraud. Every time an entity realizes that it unlikely to recover its debt from a receivable, it must 'write off' the bad debt from its books.
This ensures that the entity's assets i. Accounting entry required to write off a bad debt is as follows: Debit Credit Receivable The credit entry reduces the receivable balance to nil as no amount is expected to be recovered from the receivable.
Journal Entry for the Bad Debt Write Off The accounting records will show the following bookkeeping entries for the bad debt write off. Since this method is not according to GAAP, it not advised to use direct write-off method. DEF Example Sillex, Inc. Bad debts expense Allowance for doubtful accountsAllowance for doubtful accounts is a contra-account to accounts receivable. Accounting entry required to write off a bad debt is as follows: The double entry will be recorded as follows: We only know the estimated amount of receivables which are likely to end up uncollected.
The debit entry has the effect of cancelling the impact bad debt write off accounting journal entry profit of the sales that were previously recognized in the income statement. ABC LTD subsequently dent out that DEF LTD is being liquidated and therefore the read article of recovering its dues are very low.
Thus the use of direct write-off method would cause deduction of expenses of previous period against revenue of current period which is contrary to the matching principle of accounting. This ensures that the entity's assets i. Every time an entity realizes that it unlikely to recover its debt from a receivable, it read article 'write off' the bad debt from its books. The business uses the direct write off method and not the allowance for doubtful accounts method. Accounting entry required to write off a bad debt is as follows: Actual bad debts during financial year ended 31 December are written off against allowance for doubtful accounts as follows:
ABC LTD should write off the receivable from DEF LTD in view of the circumstances. The double entry will be recorded accounging follows: