There might be different reasons why a bad debt expense occurs. In other words, bad debts are unfortunate costs of any business due to in the company’s financial statements during the period it is incurred’ When the part of the company’s account receivables becomes uncollectible, bad debt expense must be recognized. ‘ Bad debt is an expense for any business entity. This article will explain what exactly bad debts are and how to do accounting for bad debts. Therefore, a reversal entry for bad debts is also not passed. But, no entry for credit sales was made in the first place. The condition is not true for cash-based accounting.Īlthough bad debts exist in cash-based accounting too. The event of bad debts must be recorded in the accrual accounting system. Recording bad debts or doubtful debts is necessary to depict a business’s true and fair financial position. However, once the owed money becomes uncollectible, it is called bad debt. At this stage, the money owed becomes doubtful debt. The debtor is also not responding to your calls it is the danger alarm. Let’s say the allowed period has passed, but no payments have been cleared yet. You might allow your debtors to clear the payments for goods or services that they purchase or acquired in 15 days, 30 days, or sometimes 60 days too. When you heard the word ‘bad debt,’ you might wonder if there is any good debt too? Because all of us have a general perception that debt is a bad thing.įor any business, debt has many benefits that include a low-cost capital fund and tax deductions.ĭebt, receivables, and dues are a normal affair of the business. So, any company needs debt and equity to balance its capital. Capital is a combination of equity and debt. Capital is the lifeblood of any business.
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