If it is unlikely to recover a bad debt from a debtor, you must write off the bad debt from your books. Bad debts can arise for a number of reasons ie. customers going bankrupt, a trade dispute or perhaps fraud. To claim this as a tax deduction in the 2018 financial year, the bad debt must be written off in your accounting system by your balance date.
To write off a bad debt follow this example:
In your online accounting software
- You can write off a bad debt by issuing a credit note (dated your balance date) and allocate the amount to your bad debts code (rather than sales). This credit note should be allocated against the invoice that is unlikely to be recovered.
(If you need any help doing this, please let us know.)
This ensures that your accounts receivables are not stated above the amount it can reasonably expect to recover. The credit entry will reduce the accounts receivables balance and the debit entry cancels the impact of the profit of sales that was previously recognised on the income statement.
Occasionally, a bad debt previously written off may be settled in full or part. Then it would be necessary to cancel the above by reversing the original entry by debiting the credit and recording the income as 'Bad Debt Recovered'.
If you have any queries about how to write off bad debts in your accounting system, please contact our office.
Nick Hoogeveen & Associates - Chartered Accountants
Disclaimer - This document is a guide only. It should not be used as a substitute for legislation or legal advice. Nick Hoogeveen & Associates is not responsible for the results of any actions taken on the basis of information in this document, or for any errors or omissions.