Accounting for Bad Debts

Bad Debts is a type of expense which occurs due to Customer’s inability to pay back the amount outstanding invoices reflect, in such cases, when there is a sincere or reasonable belief that it cannot be recovered, it is considered to be a good practice to write-off the amount due.

It is treated as a business loss, which could have been the income is now treated as an expense and transferred to write-off account under Expense accounts. 

Consider an example where Frank has an outstanding invoice of **GHS200**, he has gone out of business and won’t be able to clear it. 

To write-off, follow the steps below:

1. Create **Journal Entry** of type **Write-Off Entry.**

2. Select **Write Off** account to *debit* and **Debtors** to *credit.*

3. Select Party Type as **Customer** with **Frank** as Party.

4. Choose **Reference Type** & **Reference** **Invoice** you want to write off *(expand the Debtor's row and scroll down to Reference section)*.

Once the balance is written off, the amount will be booked as an expense and outstanding against Frank will start reflecting 0. 

In future, if Frank becomes *eligible* to clear his dues later or in the next year, create a reverse journal entry to remove Frank from write-off account to adjust it with the payment received.