by
Basem Eljammal , Senior Accountant , ISAM KABBANI & PARTNERS GROUP FOR CONSTRUCTION AND MAINTENANCE CO. LTD.
you should consider this funds as a revenue for the year , so your journal in such case will be
DR \ cash - Bank or whatever
CR \ other revenues
be aware that the customer account should be zero balance since the written off occurred
A bad debt relates to amounts that are owed to us and for which we think there is a high chance that they will not be paid. Bad debts also relate to amounts that we consider as not recoverable anymore. For example, if one of our customers goes into liquidation, then our receivable (the asset) that we have on your balance sheet might have to be written off.
It is important not to confuse the bad debt provision with the bad debts that are written off. The former is a provision that is created because we think that part of our receivables will not be paid (a general provision). The latter relates to specific accounts receivable balances that we think that will not be paid and will need to be written off.
Allowance for receivables and other bad debts
Companies often create a general provision for the amounts that their customers owe to them. Such provision are often calculated as a percentage of the total accounts receivable. For example, companies might think that5% of the total accounts receivable might not be paid. Other companies prefer to use the aging of their debtors and create a provision based on that. For example, a company might choose to create a provision of20% of the accounts receivable for debtors that are older than90 days,15% for debtors that are older than60 days,5% for debtors that are older than30 days etc. There is no rule for the amount that each company should allow for and each company should create a provision based on the customers’ profile, the economic situation and the nature of the business.
Bad Debt Expense
When a provision is created, a journal will need to be posted. Explanations for the journals is provided below but briefly the bad debt expense is an income statement account where the movement in the bad debts along with the write off of the irrecoverable debts is posted.
