Bad Debts in Cash Flow Statement?

by Katrien
(Havelock North, New Zealand)

bad doubtful debts

Question:

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


Thanks,
Katrien

Answer:

Hi Katrien,

That's kind of a trick question. Because bad debts are generally not included in the cash flow statement - at least, not when using the direct method:

example cash flow statement direct method

You see, bad debts are not an actual flow of cash. Remember that bad debts are simply a book entry that you record when you expect someone who owes you (debtor/accounts receivable) to not pay you in the future.

So it's just an accounting entry (a loss or expense) but there is no actual cash involved in the transaction.

Bad debts are thus included as an expense in the income statement but not included as a line item in the cash flow statement (direct method).

It should be noted that bad debts do, however, form part of the calculation of cash generated from operations when using the indirect cash flow statement, which is the preferred method in the US. For more info on exactly how and where it fits in there, see the tutorial on the indirect cash flow statement method.

Hope that answers your question! Good luck!

Best,
Michael Celender
Founder of Accounting Basics for Students


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Comments for Bad Debts in 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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