What is Bad Debt

What is Bad Debt

What is Bad Debt

When items are sold on credit, the company assumes the risk that some of the clients will never pay for the goods. Bad debt occurs when a debtor fails to pay the amount owed to him. This is a loss incurred as a consequence of a normal course of business risk.

Bad Debt Journal Entry

In the case of a sales return, there were two entries to enter:

one to record a debtor decrease and the other to record stock receipt. Debtors are decreased in the case of bad debt, but no equity is restored.

As a result, just one entry is made, in which Debtors are decreased and an expenditure titled “Bad Debts” is created.

ParticularDebitCredit
Bad Debt Accountxxxx
Debtor’s Accountxxxx

When creating financial statements, we have the following objectives in mind:

•           Charge all costs for the period against income.

•           To present data on the balance sheet that offers a true picture of the business’s financial status as of that date.

Bad debt is a corporate loss that is transferred to the income statement to be offset against the current period’s income. So, if it becomes clear that any of the debtors will not pay the amount owed to them, we must charge that receivable to the profit and loss account.

ParticularDebitCredit
Profit & Loss Accountxxxx
Bad Debt Accountxxxx

Journal Entry of Bad Debt Example

This year, XYZ Corporation was declared insolvent, and a total of 90,000 will be recorded as bad debts in the company’s accounts. In this scenario, demonstrate accounting for bad debts.

In XYZ Corporation’s books:

ParticularDebitCredit
Bad Debt Account 90,000
Debtor’s Account90,000

(90,000 is written off as a bad debt and transferred to the bad debts account)

ParticularDebitCredit
Profit & Loss Account90,000
Bad Debt Account 90,000

(Transferring 90,000 bad debts amount to current income statement or Profit and Loss Statement)

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