Bad debt is an amount owed to a business, which it considers, or proves to be, irrecoverable. There are several reasons why a debtor may fail to pay an amount due from him, e.g. death, bankruptcy, insanity, etc. Once a business is convinced that an amount due from a debtor is no more recoverable, it is prudent to remove such an amount from the books so that the figure of debtors as shown in the books of accounts and the balance sheet truly represents the amount due to the business.
The entry required to write off bad debt is as follows:
Dr: Bad Debts account
Cr.: the debtor’s personal account
With the amount deemed irrecoverable.
Bad debts account is a nominal account and represents a normal business expense. At the end of each financial year, the balance on this account is transferred to the profit and loss account.
John has learned that David who owed him $960 has died to leave no estate behind. John decides to write off this amount as a bad debt. Show the journal entry.
The effect of the above entry will be as follows:
- Bad debts account will show a debit balance of $960
- While the personal account of David, which previously showed a debit balance of $960, will be closed down, i.e. show a nil balance.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.