Bad debts in Cash Flow Statement?

by Katrien
(Havelock North, New Zealand)

Q: Where is the writing off of bad debts entered on the cash flow statement?


Thanks,
Katrien


A: It's not in the cash flow statement as it's not a flow of cash. It's just an accounting entry but there is no cash involved in the transaction. So it's in the income statement but not in the cash flow statement.

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Bad debts - indirect method
by: Sofiah

Hi,

When using the indirect method, you assume that the bad debts written off are being knocked off against the revenue/sales and that's allowed. If you wish to consider as admin expense, then you also need to adjust that in receivables activity.

A basic assumption in taking receivables/payables and inventory activity is assumption of cash in/outflow. For example if your receivables increase, it means that you have made sales (which would have costed you money but you didn't get it back) hence it is deducted and shown as cash outflow.

For the same logic, your bad debts reduced your receivables, which means you received cash, but actually you didn't which requires an adjustment. so a better option is to ignore bad debts.

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