Accounting for

BAD DEBTS
OBJECTIVES
At the end of lesson you should be able to:
✓ Define and explain the term Bad Debt.

✓ Prepare journal entries to write off bad

debts.
REVENUE OF BUSINESS
 CREDIT SALES
Buy Now Pay Later

COLLECT
Cash • Good Debtors
From
DEBTORS
Uncollectible
Write Off
• Bad Debtors

Provide for
• Doubtful Debts
• (May Go Bad)
What is a Bad Debt?
Definition:

A Debt that is unlikely to

be paid is known as a
Bad Debt.
 Can you identify any situation
where a Bad Debt can arise?
❑ Customer is declared bankrupt

❑ Customer dies

❑ Customer refuses to pay and a long

period of time has passed

❑ Customer cannot be found

Why should Bad Debts be
Accounted for?
⚫ Once a business knows for
certain that a debt cannot be
collected, it is deemed to be a
BAD DEBT and should be
written off.
Why should Bad Debts be
Written Off ?

⚫ This is in accordance with the

Prudence Concept ( whereby
profits are not overstated and
losses are written off as soon as
they are foreseen).
Journal Entry to Write-Off Bad
Debts

A Bad Debt Expense account is created

to hold all bad debts until write off at year’s
end.
Journal Entry
Debit : Bad Debt Expense a/c
(Why? To transfer the amount of unpaid
debt to BAD DEBTS a/c)

Credit : Customer’s /Debtor’s a/c

( Why? To reduce the liability of the debtor
who is unable to settle debt)
Example:
S. Lall is a debtor who owes $820.
She has become bankrupt and has agreed to pay 20 cents
on the dollar owed. Her balance is to be written off as bad
on 01 June 2008
JOURNAL ENTRY REQUIRED:

DATE DETAILS DEBIT $ CREDIT $

Example:
S. Lall is a debtor who owes $820.
She has become bankrupt and has agreed to pay 20 cents
on the dollar owed. Her balance is to be written off as bad
on 01 June 2008
JOURNAL ENTRY REQUIRED:

DATE DETAILS DEBIT $ CREDIT $

June 01, 2008 Cash ($820 x 0.20) $164

Bad Debt Expense $656

($820 - $164 = $656)

S. Lall (debtor a/c) $820

Being Bad Debt written

off after part payment
Activity 1- Write up Journal
Entry for the following:

J. Mc Intosh owes $1050. Due to

financial difficulty he is only able to pay
50 cents on every dollar.

On 01 July 2008, it was decided to write

off part of the debt as bad.
SOLUTION
DATE DETAILS DEBIT$ CREDIT$
SOLUTION
DATE DETAILS DEBIT$ CREDIT$

June 01, 2008 Cash ($1050 x 0.50) $525

Bad Debt Expense $525

($1050 - $525 = $525)

S. Lall (debtor a/c) $1050

Being Bad Debt written off

after part payment.
THE END
⚫ SUMMARY: You should now be able to
✓ Define and explain the term Bad Debt.
✓ Prepare journal entries to write off bad
debts
⚫ QUESTIONS?
⚫ Home-Work
⚫ Exc. 25.1 pg 264