Bad debt is an amount that is not receivable from the debtors*. It is treated as expense.
Debtor is a person, company or entity to whom money or things is given on the due basis is known as debtor.
REASONS FOR THE OCCURRENCE OF BAD DEBTS:
Bad debts occur due to various reasons, the debtor sometimes has financial problem, bankruptcy, fraud or problems in a collection from their debtors too.
ABC LTD Co. Sold good of Rs 1 lakh to a customer ( Adarsh) on due basis at 60 days credit.
The ABC LTD Co. has recorded the amount 1 lakh as account receivable in its Balance Sheet. But, After 60 days the customer didn’t pay the amount and declared himself as bankrupt. Now the money is irrecoverable.
Hence, it is called bad debts.
JOURNAL ENTRY FOR BAD DEBTS:
Here, bad debts involve two accounts.
(i): Bad debts Account
(Ii): Debtors Account ( Debtors Name)
Rules relating as per modern or US style of accounting :
Bad debts A/c – Debit the increase in expenses
Debtors A/c- Credit the decrease in assets
THE CLOSING JOURNAL ENTRY FOR BAD DEBTS SHALL BE: