Bad debt is an amount owed to a business that is considered—or proves to be—irrecoverable. There are several reasons why a debtor may fail to pay an amount due, including death, bankruptcy, insanity, and others.
Once a business is convinced that an amount due from a debtor is no longer recoverable, it is prudent to remove the amount from the books so that the figures in the books of accounts and balance sheet truly represent the amount due.
The entry required to write off bad debt is as follows:
- Dr. Bad Debts account with the amount deemed irrecoverable
- 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 and left no estate behind. John decides to write off this amount as a bad debt.
Required: Show the journal entry.
The effect of the above entry is:
- The Bad Debts account will show a debit balance of $960
- David’s personal account, which previously showed a debit balance of $960, will be closed down (i.e., show a nil balance)
You can learn more about Bad Debts by checking the topics below:
Reduction in Provisions for Bad or Doubtful Debts
Recovery of Bad Debts
Provisions of Bad Debts
We have also prepared practical problems and solutions that can help you clarify the concept of bad debts.