Example of Bad Debt

Example of Bad Debt

Bad debts are those trade receivable which are not likely to be paid by the customer. There are number of reason for such default which includes the bank corrupt and liquidity issues etc. The bad debts can be classified into doubt full bad debt and actual bad debts. The doubtful debt has some chances of recovery where under actual bad debt there is no chance of recovery.

Example of Actual bad Debt

ABC Company had Trade receivable of $100,000 and management is of view that one customer is bank corrupt and owing $ 5,000.

Solution

Bad is written off from the books of account and the income statement is debited and Trade receivable account is credit. Bad debt is an operating expense of the organization.

Date	Particulars	Dr.	Cr.
	Income Statement	$5,000
	Trade receivable		$5000

Example of Double Full Doubt

Saleem and Company books show a trade receivable of $ 200,000. Management is a view that a provision of 5% is required for expected bad debts.

Solution

As there are still chances of recovery therefore customer is not written off till the confirmation rather a provision is created based on management expectation. Income statement is debited under the prudence concept i.e. expense are not to be understated.

Date	Particulars	Dr.	Cr.
	Income Statement	$5,000
	Provision for Bad debt		$5000