Bad/Irrecoverable debt

 

BAD/ IRRECOVERBLE DEBT

 

Bad debt is an amount owed to a business which may not likely be paid by the debtor, having exhausted all possible means of chasing for the payment. Hence, such amounts need to be written off the books of accounts and should not continue to be presented within the debtors amounts as a current asset.

 

A bad debt is a loss to the business as it is a cost the business has to bear and so should be written off as expenditure.

 

 

Question:

This is a customer’s account in the sales ledger:

 

Andrew Smith

Date	Details	Amount (£)	Date	Details	Amount (£)
01/06/XX	Bal b/d	3,460	12/06/XX	Credit Note 33XC	454
16/06/XX	Sales	10,200

 

The customer has now ceased trading owing the outstanding amount which includes VAT.

 

Balance outstanding= £(3,460+10,200-454)= £13,206

 

£13206/6= £2201                 OR      £13206/120*20= £2201

£13206/6*5=£11005            OR      £13206/120*100= £11005

 

 

Record the journal entries needed in the general ledger to write off Andrew Smith’s debt.

 

Account name	Amount (£)	Debit	Credit
Irrecoverable debt/ Bad debt	11,005	ü
VAT	2,201	ü
SLCA/ Debtors control acc	13,206		ü

 

 

 

Question:

John Western, a credit customer has been owing an invoice amount of £1,446 and the company has now decided that this invoice should be written off as bad debt.

 

i. What will be the general ledger entries to write off this debt, where there was no VAT charge on the invoice?

 

Dr- Irrecoverable debt         £1,446

Cr- SLCA                               £1,446

 

ii. What will be the general ledger entries to write off this debt, where there was VAT charged at 20% on the invoice?

 

Dr- Irrecoverable debt         £1,205

Dr- VAT                                  £241

Cr- SLCA                               £1,446