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 |
|
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