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A debt is considered bad when sufficient steps have been taken to recover the debt, and there is justification for no longer pursuing the debt as it has no likelihood of being recovered. Only then it is considered bad, and not doubtful.

According to the IRD PUBLIC RULING—BR Pub 05/01 a debt can be written off when “the debt is adjudged as “bad” when a reasonably prudent commercial person would conclude that there is no reasonable likelihood that the debt will be paid and the bad debt is “written off” in accordance with the accounting and record keeping systems maintained by the taxpayer.”

Method 1

If you are using an accounting software with the invoicing function you can follow this method

  1. Find the specific invoice you want to write off and add a credit note.
  2. The account code on chart of accounts on the credit note will be bad debts
  3. Depending on which software you are using, this should automatically record bad debts and reflect this in your reports.

Method 2

You can mark the invoice is paid, but payment is received in the debtor suspense account. This way the invoice will disappear from the aged debtor list. Then you can post a JNL debit bad debts and credit debtor suspense account.

Method 3

If it has been confirmed that an account is no longer collectible and there has not been any allowance for doubtful debts in the books you can use the below journal entry to record bad debts.

Bad debts expense

XXX

 

Accounts receivable

 

XXX

Method 4

If you want to record an allowance for doubtful debts and write off as bad debts once confirmed you can make the following entries

In each period, doubtful accounts are estimated and expensed out by debiting ‘bad debts expense account’ and crediting allowance for doubtful accounts account using the below journal entry

Bad debts expense

XXX

 

Allowance for doubtful debts

 

XXX

Subsequently, when it is confirmed that an account receivable is no longer collectible, it is removed by debiting the ‘allowance for doubtful debts account’ and crediting ‘accounts receivable.’ Following is the journal entry to recognize this:

Allowance for doubtful debts

XXX

 

Accounts receivable

 

XXX

 

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