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A bad debt is an amount owed to your business that is not collectible and is therefore classified as an expense. Bad debt occurs when you have sold a product or service to a customer but the customer did not pay you. After all reasonable efforts are made to collect payment, you can write off bad debt as an expense in your accounting system. Because bad debts are expenses, they appear on the income statement (also called the profit and loss statement) and reduce net income. There are many reasons your customers may not make payment on an invoice, such as poor cash flow management or bankruptcy, and small businesses often need to write off bad debt. Unfortunately, the reality is that some of your customers may not be able to pay and you will need to make the appropriate adjustments to your accounting data.
Direct write-off method is one of the two most common accounting techniques of bad debtstreatment. In the direct write-off method, uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts. When debt is determined as uncollectible, a journal entry is passed in which bad debts expense account is debited and accounts receivable account is credited as shown below.
Bad Debts Expense——
Accounts Receivable——
Direct write-off method does not use any allowance or reserve account.
Although the direct write-off method is simple, it has a major drawback. Often it violates the matching principle of accounting because it recognizes bad debt expense which is partly related to previous accounting period. For example if sales are made at the end of accounting year20X1, bad debts will be realized in the beginning months of accounting year20X2. 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.
Since this method is not according to GAAP, it not advised to use direct write-off method. Instead, the allowance method of bad debts treatment is preferred.
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WAleed
When a customer doesn't pay to the company anymore.
BAD DEBT to get bad debt you can allow discount on receivable amount.
and if you received the bad debt and already you have provissionfor the same than the amount what ever your received will be treated as other income or as per company policy,
BED debt or BAD debts? In case of bad debts, you should have provision (payable on balance sheet) and deduct it from provision. In that case it will not have any effect on your P&L. In case you don't have any bad debt provision, you should deduct it from your profit as an expense and it will decrease your profit.
minus it frm current income... & thn show also in profit & loss account in expens side.
'bed debts' can only be incurred by prostitutes, when their clients don't end up paying them. Inorder to minimize bed debts they could always demand the money before hand...
:P
Did u Mean Bad Debts?
Bad Debts usually refers to Accounts Receivable (or trade accounts receivable) that will not be collected.
