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If you are sure that your certain receivable(s) is/are dead and can not be collected now, you pass it directly to expense. Journal entry will be following.
Bad Debt Exp ---------------Dr
Receivable Account ----------------Cr
If your some receivables getting old and you have doubt that these receivables will not recover, you start to create provision for those kind of receivables. In this method you keep your receivables in your books and create a provision against expense. This provision is adjusted in your balance sheet against net receivables. Journal entry will be following.
Bad Debt Expense ------------- Dr
Provision for Bad Debts ------------ Cr
This is a good practice to keep some provision of bad debts some % of your receivables every year so that any future bad debts can not put bad impact on your future income statement.
We generally create provision for doubtful debts instead of writing off the debts, so to create a provision, the entry should be : Bad and doubtful debts A/C ...... dr and Provision for bad and doubtful debts A/C .........cr. Please note we are creating only a provision here, debtors accounts remains unaffected.
Once it is confirmed that the debt is not recoverable and management approves to write off the debt from books, the following entry should be passed - Prov. for bad and doubtful debts A/c .....dr and Debtors A/c ..........cr. So in the year of actual write - off only the provision is reduced and nothing is affecting the expenses account.
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these are accounting treatment Provision & expense out on historical calculation basis.
Bad Debt can be written off using below entry
DR. ALLOWANCE FOR BAD DEBTS (EXP'S)
CR. ACCOUNT RECEIVABLE
if you wish to take only a provision against doubtful receivables, pass below transaction.
DR. ALLOWANCE FOR BAD DEBTS (EXP'S)
CR. PROVISION FOR ALLOWANCE OF BAD DEBTS
Under above entry, Provision for bad debts acts as a contra asset account. Later you may close provision for bad debts with account receivable upon realizing the actual unrecoverable receivable amount.
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In accordance new expected loss model under IFRS9 initially a credit loss allowence/provision will be required measured for trade recieveables(financial asset) based on 12 month expected losses.If there is a significant financing element then the credit loss allownce/provision will be based on present values discounted at market rate and subsequently unwinding .
Subsequently if credit worthiness not detoriated then 12 month's expected loss will be continued however if credit worthiness detoriate/impaired then lifetime expected losses will be recognised.For credit impaired recieveables a direct charge will be made to recieveables and P&L account.
Entries will be
Initial:
Dr. P&L xx
Cr. Loss allownce xx
Subsequent
Dr.P&L xx
Cr. loss allownce xx (if credit loss allownce reduces then the entry will be reversed)
If credit impaired
Dr.P&L xx
Cr. recieveables xx
In balance sheet recieveables will be shown net of any credit loss allownce/provision.
However for non financial companies a simplified accounting treatment is allowed.
In this method lifetime expected losses will be recognised initially instead of 12 month's expected loss.For those recieveables with significant financing element it is optional treatment.Provision matrix based on historical experience along with expected events in future is allowed to calculate lifetime expected losses.
The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. It is identical to the allowance for doubtful accounts. The provision is used under accrual basis accounting, so that an expense is recognized for probable bad debts as soon as invoices are issued to customers, rather than waiting several months to find out exactly which invoices turned out to be uncollectible. Thus, the net impact of the provision for doubtful debts is to accelerate the recognition of bad debts into earlier reporting periods.
