![]() ![]() *The last entry in the above table is closing entry and it has no relevance if are using accounting software. Accounting Treatment for Bad Debts Expenses The following section details the accounting treatment of bad debts. In other words, the amount of bad debt expenses should be transferred to Profit & Loss A/c for the current year to confirm the principles of matching. If it is definitely known to you that amount recoverable from a customer cannot be realized at all, it should be treated as a business loss and should be adjusted against profit. The definition remains the same in the business as well, but the treatment of bad debts is a little different. When you are sure that you can’t recover the amount, you lent your friend is when the ‘debt’ becomes bad debts. In simple words, it amount of debt which is impossible to collect is called bad debts. Bad Debts Meaningīad debts are the debts which are uncollectable or irrecoverable debt. This is when the theory of ‘Bad debts’ gets introduced. As long as he is in a position to pay you or you believe that you can recover the amount from him, is known as ‘good debts.īut when the situation of your customers gets worse or your belief that he will pay you is in doubt, is when you got to deal with the debts differently. The person to whom the credit is lent is known as ‘Debtors’. There is no rocket science why a business supplies on credit. In business, it arises more often when goods or services are supplied in credit terms. You just lend a few hundred to your friend, its amounts to debt. Debt is the amount which is recoverable from a person or entity. Bad Debts Expenses in Financial Statementĭebt is the most common word, not just in business but across different situations.Accounting Treatment for Bad Debts Expenses.
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