Bad debts in Cash Flow Statement?

by Katrien
(Havelock North, New Zealand)

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


Thanks,
Katrien


A:
Hi Katrien,

That's kind of a trick question. Because bad debts are generally
not included in the cash flow statement.

You see, bad debts are not an actual flow of cash. It's just an accounting entry (a loss or expense) but there is no actual
cash involved in the transaction.

So it's included as an expense in the income statement but not included as a line item in the cash flow statement.

Even when using the indirect method of the cash flow statement, the first line item is net profit (or loss), which already has the bad debt expense baked in (already included in the income statement to calculate net profit).

Later on in the indirect method we reverse the effect of receivables (accounts receivable or debtors), which already factors in bad debts written off (bad debts reduces receivables - it's money we're recognizing we will actually
not be paid).

Best,
Michael Celender
Founder of Accounting Basics for Students


Return to the full tutorial on the Cash Flow Statement (Example, Format and Components - Direct Method)

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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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