Bad debts refer to the money a business is unable to collect from customers who have not paid for goods or services that have been provided. It is an expense that is recorded when a business determines that a customer’s account is uncollectible. The expense is recorded in the company’s income statement, and it reduces the company’s revenue for the period.
For example, a company has a customer who owes Rs.1,000 for goods or services provided. After several attempts to collect the debt, the company determines that the customer is unable to pay and considers the debt to be uncollectible. The company would record the bad debt expense as follows:
- Bad debt expense = Amount of uncollectible debt
- Bad debt expense = ₹ 1,000
This means that the company would record an expense of ₹ 1,000 in the income statement of the period when it’s decided that the debt is uncollectible.
It’s important to note that bad debt is not a standard expense for all businesses, and the level of bad debt can vary widely depending on the industry and the credit policies of the business. However, when it is recorded, it should be recorded as a separate expense in the income statement, and it should be recorded net of any amounts that have been previously reserved for or written off as bad debt.
Properly tracking and accounting for bad debt is important for businesses to maintain accurate financial records and to provide an accurate picture of the business’s performance and financial health. Additionally, it could have an impact on the company’s tax liabilities and credit worthiness.
