A customer has been invoiced 200 for goods and the business has decided the debt will not be paid and needs to post a bad debt write off.
The original invoice would have been posted to the accounts receivable, so the balance on the customers account before the bad debt write off is 200. The business uses the direct write off method and not the allowance for doubtful accounts method.
A bad debt write off is recorded in the accounting records as follows:
Journal Entry for the Bad Debt Write Off
The accounting records will show the following bookkeeping entries for the bad debt write off.
|Bad Debt Expense||200|
Bad Debt Write Off Bookkeeping Entries Explained
The bad debt write off is an expense for the business and a charge is made to the income statement through the bad debt expense account.
The amount owed by the customer 200 would have been sitting as a debit on accounts receivablet. The credit above reduces the amount down to zero.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
|Accounts receivable||=||+||Bad debt expense|
|– 200||=||0||+||– 200|
In this case an asset (accounts receivable) is reduced as the balance on the account is cleared to zero, the income statement has been charged with the bad debt write off, reducing the owners equity.
Note: The charge to the income statement reduces the net income which reduces the retained earnings and therefore the owners equity in the business.
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