What is Bad Debts ?
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deepika2029
Manoj
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- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:35 am
consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:36 am
Extending credit to customers is a great way to encourage impromptu purchases, boost sales, and increase profits. But sometimes, customers don’t pay you, resulting in a bad debt. What is bad debt?
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:36 am
A bad debt occurs when someone owes you money but you are unable to collect it. The debt is worthless because you cannot collect what you are owed.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:36 am
As a result, you write off the debt as uncollectible. For most small businesses, this happens when you extend credit to customers.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:37 am
The customer uses store credit and receives your business product upfront. After invoicing the customer repeatedly without success, you realize their debt has become a bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:37 am
Creditors can also incur bad debts on account of you. If you don’t pay for items you’ve purchased on credit, your vendor will be faced with a bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:37 am
Bad debts can happen for a number of different reasons. Customers might not have the money to pay their debt. Or, a customer might be unhappy with your product or service and refuse to pay.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:37 am
Regardless of the reason, too many bad debts can cripple a small business.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:37 am
If you deal with bad debt, you should also understand doubtful debt. Do not confuse the two terms.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:38 am
Doubtful debt is money that you think will turn into bad debt, but it isn’t officially marked as uncollectible. There’s hope that doubtful debt will turn into a payment, unlike bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:38 am
Businesses can label a certain number of their sales on credit as doubtful debt so their finances don’t take a major hit when a customer won’t pay. Instead, the business predicts that some debts will go unpaid.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:38 am
Knowing when to call a debt a bad debt can be difficult. There isn’t a switch that immediately changes it. However, here are a couple ways you can tell if you are faced with a bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:39 am
A debt might become a bad debt if you have exhausted all options to get the customer to pay. For example, you may have attempted to contact the customer with no response
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:39 am
Or, you might have offered to negotiate payment terms. Keep in mind that you must follow debt collection rules, established by the FTC, to collect the debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:39 am
If you decide that the debt isn’t worth pursuing, you might write it off as a bad debt. Then, you will need to update your accounting records to reflect the transition of a debt to a bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:39 am
Bad debts take place in double-entry accounting.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:40 am
When you make a sale to a customer who pays with credit, you must debit your accounts receivable account and credit your inventory account.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:40 am
. You hope to eventually credit the accounts receivable account and debit your cash account, but you can’t do that if a customer doesn’t pay.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:40 am
Instead, you need to know how to write off bad debt. There are two methods you can use so your accounting books reflect a bad debt expense.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:40 am
Many businesses set up a bad debt reserve, which is known as an allowance for doubtful accounts. The goal of this account is to offset the planned or anticipated loss incurred by bad debts.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:40 am
Other businesses simply reverse their original entry by crediting their accounts receivable account and debiting their bad debts expense account.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:41 am
In some cases, bad debts can be collected. If you hire a collection agency to pursue a customer’s payment, you might eventually receive money that you had written off as bad debt.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:41 am
In this situation, you will need to reverse the bad debt journal entry.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:41 am
If you have a bad debt that was previously included in your gross income, you can claim it with the IRS to reduce your business’s tax liability.
- meenu007
- Posts : 9617
Join date : 2019-01-07
Re: What is Bad Debts ?
Tue Jan 08, 2019 11:41 am
Updating your accounting books to reflect bad debts can be time consuming and confusing. Patriot’s online accounting software helps simplify the recordkeeping process.
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