Bad Debts

Written by True Tamplin, BSc, CEPF®

Updated on December 21, 2022

Bad debt is an amount owed to a business that is considered—or proves to be—irrecoverable. There are several reasons why a debtor may fail to pay an amount due, including death, bankruptcy, insanity, and others.

Once a business is convinced that an amount due from a debtor is no longer recoverable, it is prudent to remove the amount from the books so that the figures in the books of accounts and balance sheet truly represent the amount due.

The entry required to write off bad debt is as follows:

  • Dr. Bad Debts account with the amount deemed irrecoverable
  • Cr. the debtor's personal account with the amount deemed irrecoverable

Bad debts account is a nominal account and represents a normal business expense. At the end of each financial year, the balance on this account is transferred to the profit and loss account.

Example

John has learned that David, who owed him $960, has died and left no estate behind. John decides to write off this amount as a bad debt.

Required: Show the journal entry.

Bad Debts Journal Entry

The effect of the above entry is:

  • The Bad Debts account will show a debit balance of $960
  • David's personal account, which previously showed a debit balance of $960, will be closed down (i.e., show a nil balance)

You can learn more about Bad Debts by checking the topics below:

Reduction in Provisions for Bad or Doubtful Debts

Recovery of Bad Debts

Provisions of Bad Debts

We have also prepared practical problems and solutions that can help you clarify the concept of bad debts.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.