What to do About the Bad Debts on your Books?

debt on your books

One can only imagine the possibility of the existence of an utopian world. Same goes for your business and day to day transactions. One may assume to get paid for all the goods or services that you provide to a customer. But unfortunately, instances of a receivable not being collected occur, even after your attempts to collect the debt. Now that is one of the ways how an error creeps into your accounts.

It is necessary to write off a bad debt when the related customer invoice is considered to be uncollectible. Otherwise, a business will carry inordinately high accounts receivable balance that overstates a number of outstanding customer invoices that will eventually be converted into cash.”

There are mainly two methods for writing off the bad debt from your records. These are namely,

  • Direct debt write – off

A customer’s, “uncollectible account” is first identified in this method and then removed from the account Accounts Receivable. This method is required for U.S. income taxes and results in a debit to Bad Debts Expense and a credit to Accounts Receivable for the amount that is written off.”

  • Allowance method

The allowance method, however, “anticipates that some of the accounts receivable will not be collected. In other words, prior to knowing exactly which customers or clients will not be paying, the company will debit Bad Debts Expense and will credit Allowance for Doubtful Accounts for an estimated, anticipated amount.

This is a preferred method because,

1) the balance sheet will be reporting a more realistic amount that will be collected from the company’s accounts receivable, and

2) the bad debts expense will be reported on the income statement closer to the time of the related credit sales.”

However, if you plan on deducting the bad debt, then you must use the direct write-off method. Keep in mind that once you decide that you’re going to write-off the debt you need to stop contacting the customer. Once it’s in the books, it’s gone.

  • Prevention is better than cure.

Most of the times the mistakes that occur are unavoidable but not at all times. Instead of getting a bad debt on your record, be cautious so as to avoid it because it is going to hurt you to remove that bad debt from your record. Here are a few helpful tips and tricks.

  • Always sign contract with the client making them liable for the payment of the goods and services that you are providing.
  • Make down payments necessary.
  • Start billing out immediately and make invoicing a priority.
  • Keep reminding the clients of the upcoming due date of the invoice so that it doesn’t become past due.
  • Follow up on late payments immediately. There are tools out there which will do this automatically for you.
  • There should be no communication barrier between you and your clients.
  • Offer discounts and other incentives for payments prior to the due date of the bill.

Take legal action whenever necessary and don’t hesitate to hire a collection agency if the need arises. Though be cautious as they too are out there to fill their pockets only.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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