Bad Debt: Accounting entry in tally

One of tally nine reader Mr. Mohammad Saleem  requested me to write about bad debt and accounting of bad debt in tally.

In business bad debt is common in view of accounts and a business unit has always fear of bad debt when goods are being sold on credit period. High bad debt reflects poor sales management and lack of managerial control over the business and over the passage of time, units having high debt in accounts turns to bankruptcy.

bad debt is generally refers to the amount which is doubtful to receive from your debtors. It is also known as bad and doubtful debt.  Bad debt arise under following circumstances:

What is Bad Debt

  • 1) When there is no possibility to recover an amount from you debtor.
    2) Your debtors become insolvent or run away.
    3) All your efforts becomes fruitless to recover the amount.
    4) There is a legal dispute between you and your debtors regarding the quantum or  genuineness   of the debt
  • 5) Under any case, when the management is of the opinion that there is no possibility to recover certain amount
  • How to do accounting entry manual and in tally

  • In tally, bad debt entry is made through a  journal voucher
  • In case of bad debt, the accounting entry are made as under :
    Dr. Bad Debt Account (Under Group Indirect Expenses)
    Cr. Debtors account
    Entry can also be made directly by
    Dr. Profit and loss account
    Cr. Debtors account
  • Suppose, you have sold goods worth of Rs. 3,50,000.00 to one your debtors M/s. Shah Brothers  who is regularly paying your debt. He paid the Rs. 3.25 lac and then he inform you that he is not in a position to pay you balance Rs. 25000.00. You do not want to file  a legal case against your debtor on the matter  to recover your amount and decides to write off the amount as bad debt.
    you will require to pass the below entry:
  • Dr. Bad debt account   Rs. 25000.00
    Cr. Shah & Bros. Rs. 25000.00
    (Being amount written off as per letter dated…… of suppliers… )
  • Things seems to be easy however it is not easy. An Assesses has to prove the legitimate of the amount written off as bad debt. If the Income tax officer reject the amount of bad debt, then the assess will be require to pay tax on such amount written off.
  • Let we go further in the above case. After you have written off the amount of Rs. 25k as bad debt, and then again you have sold fresh goods to  the same customer on credit base then the amount you have written as bad debt will be considered as a suspicious transaction. The tax authority will look this kind of transactions as a way of tax evasion.
  • Bad debt also can be credited to provision for bad debt. that is leaving the debtors account balance unaffected, and creating a provision account for that part of the amount.
    When the unit is not sure of the exact amount that is not possible to write off, they can use provisional figure and in this case, the entry will be made as under :
    Dr. bad debt account (Under group indirect expenses)
    Cr. Provision for bad debt) (under group provision)
    When the figure of bad debt is finalised
    Dr. provision for bad debt
    Cr. Debtors account
  • Generally public limited companies and big organizations always follow this system.
    Impact of bad debt on financial statements
  • like other expenses bad debt is also an expenses which reduce the profit of the company(or increase loss)
    On the other side it decrease or reduce your current assets (Receivable amount from your debtors)
  • a high amount of bad debt indicates mis management in respect of sales and collection policy.
  • Be sure, you can not write off any amount payable to your supplier as bad debt!

If you are not familiar with basic rules of accounting then I suggest you to read my article on basic rules of accounting and some more thumb rules of accounting for a better understanding of accounting

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