Journal Entry for Bad Debts

What are Bad Debts ?

Bad debts refer to the amounts owed to a company by its customers or debtors that are deemed uncollectible. It occurs when a customer fails to fulfill their payment obligation, typically due to financial difficulties, bankruptcy, or unwillingness to pay.

When it becomes evident that a specific customer’s debt is uncollectible, it is considered a bad debt. The company needs to write off the amount from its accounts receivable and recognize it as an expense in the income statement.

This allows the company to reflect the true value of its accounts receivable and provide a more accurate picture of its financial position.

Journal Entry for Bad Debts is as follows:

How Bad Debts are shown in Final Accounts ?

The bad debt expense is typically reported as a separate line item in the income statement under operating expenses.

Example#1

Let’s assume that Company XYZ had a customer named ABC Corp to whom they had extended credit for a sale of $1,000. However, after several attempts to collect the payment, it became evident that ABC Corp is unable to pay the outstanding amount of $1,000.

Solution:

The Journal Entry for Bad Debts would be as follows:

The entry recognizes the bad debt expense as an expense in the income statement and reduces the accounts receivable balance by the amount deemed uncollectible.

By recording this journal entry, the company acknowledges the loss associated with the uncollectible account and updates its financial records accordingly. The bad debt expense will be reported in the income statement, reducing the company’s net income, and the accounts receivable balance will reflect the adjusted amount owed by ABC Corp.

When Bad Debts are recording butat later point in time these Bad Debts are recovered, read here how to recrod it.

What are Bad Debts ?