Accounting for Bad Debts

Bad Debts is a type of expense which occurs due to Customer’s inability to pay back the amount outstanding invoices reflect, in such cases, when there is a sincere or reasonable belief that it cannot be recovered, it is considered to be a good practice to write-off the amount due.

It is treated as a business loss, which could have been the income is now treated as an expense and transferred to write-off account under Expense accounts.�

Consider an example where Frank has an outstanding invoice of $200 , he has gone out of business and won’t be able to clear it.�

To write-off, follow the steps below:

  1. Create Journal Entry of type Write-Off Entry.
  2. Select Write Off account to debit and Debtors to credit.
  3. Select Party Type as Customer with Frank as Party.
  4. Choose Reference Type & Reference Invoice you want to write off (expand the Debtor's row and scroll down to Reference section) .

Once the balance is written off, the amount will be booked as an expense and outstanding against Frank will start reflecting 0.�

In future, if Frank becomes eligible to clear his dues later or in the next year, create a reverse journal entry to remove Frank from write-off account to adjust it with the payment received.