What is the Journal Entry for Bad Debts?
by DARSHAN B M
Q: What is the journal entry for bad debts?
A: First of all, let's define bad debts.
Bad debts are debts to your business that have gone "bad," meaning the guy who owes you says he can't pay.
The amount that won't be paid to us is a loss or expense for our business.
Bad debts are also sometimes called doubtful debts.
We use the term debtors or receivables in accounting to describe people who owe our business. When a bad debt occurs, it means that the amount of our debtors will be less - we have to reduce our debtors account.
But first let's look at what happens before a bad debt comes up - let's look at how we first record a debtor.
The first thing that happens is that someone owes us money. For example, we provide IT services to Mr. T and he owes us the money for this. The entry would be:
Debit: Debtors control account (asset)
Credit: Services rendered (income)
The debtors account is an asset account, meaning it occurs or increases on the debit side.
Now Mr. T says he can't pay us, so we need to reduce his account and record the bad debt expense.
The journal entry for bad debts is as follows:
Debit: Bad debts (expense)
Credit: Debtors control account (asset)
What this journal entry means is that we are recording the loss of the money we expected to get in in the future (from Mr. T, our debtor).
Since the debtors account occurs (or increases) on the debit side, if we want to decrease it now, we have to credit it.
Full lessons, questions and exercises for bad debts as well as provision for bad debts are not available on this site, only in my accounting books.
Hope that explanation helps you!
- Michael Celender
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