A customer has been invoiced 200 for goods and the business has decided the debt will not be paid and needs to post a bad debt write off.
The original invoice would have been posted to the accounts receivable, so the balance on the customers account before the bad debt write off is 200. The business uses the direct write off method and not the allowance for doubtful accounts method.
Journal Entry for the Bad Debt Write Off
The accounting records will show the following bookkeeping entries for the bad debt write off.
|Bad Debt Expense||200|
Bad Debt Write Off Bookkeeping Entries Explained
The bad debt written off is an expense for the business and a charge is made to the income statement through the bad debt expense account.
The amount owed by the customer 200 would have been sitting as a debit on accounts receivable. The credit above reduces the amount down to zero.
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 plus equity 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.
|Accounts receivable||=||None||+||Bad debt expense|
|– 200||=||0||+||– 200|
In this case an asset (accounts receivable) is reduced as the balance on the account is cleared to zero, the income statement has been charged with the bad debt written off, reducing the owners equity.
Note: The charge to 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 in 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 BSc from Loughborough University.