Bad Debts

Bad debts are the amount which is written off by the company as loss to the business and considered as an expense since the debt owed to the business is unable to be accumulated and all reasonable efforts have be exhausted to collect the amount owned. This generally occurs when the debtor has declared insolvency or bankruptcy or of pursuing further action in an effort so as to collect the debt goes beyond the debt itself. The bad debt shows money lost by a company that is why it is considered as an expense. Whereas the doubtful debts are those debts that individual or a company is doubtful to be able to collect.

Difference between Bad Debts and Doubtful Debts:

Both these accounts are charges against profit. Consequently both of them are debited to profit and Loss Account. But they are not the same. They have the following differences:

Nature: Bad debts are those debts for whose recovery every attempt has been unsuccessful. Consequently, it has been decided to write them off.  Provision for bad debt and doubtful debt is a provision for the anticipated future loss on account of bad debts.

Relation with Debtors: Bad debts are treated as a loss. So they are debited while Debtors’ Accounts are credited. Thus actual debtors are reduced to that extent. Provision for Bad debts and Doubtful debts is outwardly independent of debtors. It is opened by debiting Profit and Loss Account.

Closing and Balancing:  Bad Debt is closed by transfer to profit and loss account. Provision for Bad debts and doubtful debts account is balanced. It is shown as a deduction from sundry debtors in balance sheet.

Continuity: Bad Debts account is a nominal account. So it is closed every year. A new account is opened in every accounting period. Provision for bad and doubtful debts account may be continuous account. Thus in a new accounting period, it may start with a credit opening balance.

Questionnaire:

• What are bad debts?
• What are the difference between bad debts and doubtful debts?