A customer has been invoiced a total of 500 for goods and the business has decided that there is doubt as to whether the customer can pay in full. They have decided to make a bad debt provision (allowance for doubtful accounts) against the debtor of 200.
The original invoice would have been posted to the debtors control, so the balance on the customers account before the bad debt provision is 500.
A provision for bad debts is recorded in the accounting records as follows:
Journal Entry for the Bad Debt Provision
The accounting records will show the following bookkeeping entries for the bad debt write off.
|Bad debt expense||200|
|Bad debt provision||200|
Bad Debt Provision Bookkeeping Entries Explained
The provision for the bad debt is an expense for the business and a charge is made to the income statements through the bad debt expense account.
The amount owed by the customer is still 500 and remains as a debit on the debtors control account. However, the credit above is placed on the bad debt provision account in the balance sheet to reflect the uncertainty over payment.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case an asset (net debtors) is reduced by the credit entry to the provision for bad debts account. In addition, on the other side of the accounting equation the income statement has been charged with the bad debt expense, reducing the owners equity in the business.
Note: The expense in the income statement reduces the net income which reduces the retained earnings and therefore the owners equity in the business.
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Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.