Note: Before you proceed with these instructions we recommend you discuss the Bad Debts / Irrecoverable Debts with your Accountant prior to processing any “Write-Offs”.
It's an unfortunate aspect of running a business that you may not be able to recover balances outstanding in respect of certain receivables (debtor invoices). These are referred to as Irrecoverable Debts or Bad Debts.
Bad debts could arise for a number of reasons such as your customer going bankrupt, a trade dispute or fraud. Once you realise that it is unlikely you will be able to recover a debt from a receivable, you must 'write off' the bad debt in your cashbook.
This ensures that your assets (i.e. receivables) are not stated above the amount you can reasonably expect to recover.
Writing off bad debts are effectively processing a Credit Note against the invoice to clear the amount, however, a Credit Note may have an effect on your stock control or inventory so the Journal Entry is the preferred method of dealing with irrecoverable amounts.
Accounting Entry required to write off a bad debt
|Debit||Bad Debt Written Off|
The Credit entry reduces the receivable (invoice) balance to nil.
The Debit entry has the effect of cancelling the impact on profit (of the sales that were previously recognised in the P & L Statement) hence reducing your potential Tax Liability.
The Debit entry also negates the GST accrual from the invoice.
Demonstration Farm sells 3 rams to A B Farmer for $900 on credit and an invoice is raised.
Demonstration Farm subsequently learns that A B Farmer is being liquidated and therefore the prospects of recovering the $900 are very low. Demonstration Farm should write off the receivable from A B Farmer. The entry will be recorded as a Journal Entry in Agrimaster as follows:
|Debit||Bad Debt Written Off||$900|
Note: because Agrimaster is a single-entry cashbook, you will need to record the Journal Entry as two separate transactions.
Note: The same general process applies to Basic Invoicing and Enhanced Invoicing although there are differences in receiving the payment between each module.
How to record the Journal Entry in Agrimaster
- Firstly you need to clear the Invoice by marking it as paid
- You can then see the Credit Transaction
- Click Add New Transaction
- Unless you have previously created the code, click the Code heading to create a new Expense Code named Bad Debt Written Off under ADMIN or OVERHEADS
Now post the other half of the Journal Entry as shown below. Enter as much detail as you need to clearly explain the transaction.
- Use Expense Code Bad Debt Written Off
- The GST is calculated so that you will not be paying GST for income not received
Note: when you reconcile this month mark both transactions as reconciled even though neither will appear on your bank statement.
Your P & L Report will record amounts written off like the sample shown below.
Note: once a debt has been written off DO NOT inform the Debtor.