As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business. So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the businessRead more
As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business.
So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the business and it may arise due to reasons such as fraud, insolvency of the debtor, etc. We can also refer to it as Uncollectible Accounts Expense and Irrecoverable Debts.
Yes, bad debts are recorded in the Income statement. The Income statement shows the aggregate financial position of a business during a specified period by displaying the amount of revenue generated and expenses incurred by a business. Bad debts being an expense are recorded under operating expenses in the Income Statement or on the debit side in the Profit & Loss a/c.
Example
ABC Ltd. sells goods to a retailer for 40,000 at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and the amount is no longer recoverable. This amount of 40,000 is an expense for ABC Ltd and leads to a fall in the accounts receivable.
The journal entries to be recorded in the books of ABC Ltd are as follows:
| Bad debts a/c | Debit | 40,000 | Debit the increase in expense |
| To Retailer’s a/c | Credit | 40,000 | Credit the decrease in asset |
(being amounts written off as bad debts transferred to bad debts account)
| Profit and loss a/c | Debit | 40,000 |
| To Bad debts a/c | Credit | 40,000 |
(being bad debts transferred to profit and loss a/c)
Bad debts as shown in the Income statement
(Extract of Income Statement)
| PARTICULARS | AMOUNT | AMOUNT |
| Revenue | 8,00,000 | |
| Expenses: | ||
| COGS | 50,000 | |
| Insurance expense | 60,000 | |
| Depreciation expense | 20,000 | |
| Bad debts expense | 40,000 | |
| Total Expense | 1,70,000 |
Hope this helps.
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Adjustment in final accounts Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:Read more
Adjustment in final accounts
Adjustment of bad debts is often a tedious task for the students which ultimately leads to an error and false representation of the financial position of the business. They are adjusted in two ways depending on their record in the books of accounts, which is as follows:
1. Treatment of bad debts before preparation of trial balance
As a debtor fails to pay the due amount his account is credited and closed as well as a new account is opened known as the Bad debts account.
In the trial balance:
The net amount of bad debts incurred during the financial period and the Sundry debtors excluding the amount of bad debts appear as a separate item in the Trial balance on the debit side.
In the Income statement or the Profit and loss a/c:
Bad debts being an expense are recorded under operating expenses in the income statement or on the debit side of the Profit and loss a/c.
Journal entries for adjustment of bad debts:
(being bad debts written off)
(being bad debts transferred to p/l a/c)
2. Treatment of bad debts after the preparation of trial balance
Sometimes the amount of bad debts may be mentioned as an adjustment item outside the Trial balance. These types of debts are often referred to as further bad debts and have not yet been written off. To provide a true financial position of the company it is necessary to include these bad debts while preparing the Final accounts.
In the profit and loss a/c:
They are added to the already written off bad debts and appear on the debit side of the profit and loss a/c.
In the balance sheet:
They are deducted from the adjusted sundry debtors on the asset side of the balance sheet.
Journal entry for adjustment of further bad debts:
(being bad debts written off)
Example:
The extract of the trial balance of XYZ Ltd. is as follows:
XYZ Ltd. sells goods to a retailer at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and only an amount of 4,000 will be received against the total amount of 8,000. The adjustment in the final accounts is as follows:
(being amount irrecoverable from the retailer)
Extract of Profit and loss a/c
Extract of balance sheet
(-) Further bad debts 4,000
Hope this helps.
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