Provision for bad debt

sini

I work in AR I been asked to post the invoice that we do not believe we can collect to bad debt provision instead of revenue.

Debit Receivable (b/s)
Credit Dealer Bad Debt Provision (b/s)
Credit VAT (b/s)

Do you think this is correct way of counting it and what will the entry be to move it to the bad debt (p&l)?


Many Thanks for your advice!

Dcollins

Looks like your debits and credits are the wrong way round. You need to reduce the b/s asset (or amounts receivable) not add to it.

I'd post a specific and certain bad debt straight to the P&L.

Be careful with the VAT, you need to take the due date into account when working out when to claim bad debt relief, and check VAT notice 700/18 to make sure it meets the criteria. And remember if you do receive any payment from the debtor in future you need to pay the appropriate amount of VAT.

Hope that helps

Monsoon

I'm not clear whether by 'post straight to bad debt' you mean bypass posting to sales?

The postings need to be:

Dr Debtors, Cr Sales (as the sale needs to go into turnover)

Then to record the specific bad debt provision:

Dr Bad debt expense Cr Doubtful debt provision

I would only post a Cr to debtors when you are actually going to write off the debt, leave it in doubtful debts until you do.

Heed what Dcollins says about VAT bad debt relief.

A specific provision against doubtful debts is allowable against tax; a general provision is not.

Dcollins

In my post I'd assumed that the original sales invoice had already been posted to debtors, sales and VAT as normal, and by 'post straight to P&L' was thinking in terms of writing-off. Hence the VAT comment. Sorry if that assumption was incorrect, or caused confusion. It would seem strange to me that you'd have an unposted sales invoice and already be considering it as a bad debt.

Anyway, I must remember not to make assumptions. That's how people fail exams, isn't it?