What are Account Receivables
The amount receivable against credit sales are known as account receivables or trade receivables. The receivable carry a great risk of not paying the debt which is technically known as bad debt.
How many Types of Bad Debts
There are basically two types of bad debt i.e actual bad debt and doubtful bad debts. The actual bad debt has little chance of recovery . The doubtful debt however has some chances of recovery.
What are the main reason for bad debt
The main reason for bad debt is financial constraint and liquidity problems facing by the customer.There are number of reason for financial constraint and liquidity problems i.e. customer incurring a heavy loses, fall in demand in the market, general industry recession , general economy recession.
Accounting Treatment of Actual Bad debts
According to prudent concept of accounts the assets are not to be overstated in the books of account. Therefore the debts which are not likely to be recover must not appear as an receivable in the books of accounts and must be written of in the books of accounts.
The bad debt will be charged to income statement as expenses and the receivable amount will be reduced accordingly . In technical term the bad debt will be debited and receivable a/c will be credited.
Example of Bad Debt Journal Entry
The company has a receivable amount of 40,000 out of which a customer owing 3000 is declared bankrupt. what would be the appropriate Journal Entry
Bad Debt 3000 Dr
Account Receivables 3000 Cr
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