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Bad Debts

Bad Debts are Accounts Receivable that will likely remain uncollectable and will be written off.  

Bad Debts appear as an expense on the organisation's Profit and Loss Account thus reducing net income and as a liability in the Balance Sheet.

There are two types of Bad Debts. The first type is a General Bad Debt Provision.  Organisations make an estimate of bad debts that might be incurred in the current time period based on past records, relationships with debtors and age of account receivable.  Most organisations make a general bad debt provision since it is unlikely that all of their debtors will pay in full.

In Yendo we need to set up an expense account called Bad Debt Expense.  This is done by using the Chart of Account function under the Settings link. Use the plus icon at the top left hand side of the screen to add a new account.

Account Type......expense
Account Name......Bad Debt Expense
Account Code....4XX (all accounts have a three digit code. Expense codes start with 4 and you can add any two digits after that).


You need to give the account a description and then save the account.  
This account will now appear on your organisation's profit and loss account.

We also need to set up a current liability called Bad Debt Provision  which will appear as a liability in the organisations Balance Sheet under Current Liabilities.
Again, you need to go into Chart of Account under the Settings link.

Account Type.....Current Liability
Account Name...Bad Debt Provision

Account Code...8XX
You need to give the account a description and then save the account.
This account will now appear on your organisations Balance Sheet.

When the amount of the bad debt is ascertained you need to reflect this amount in your organisations records. In Yendo you need to go to Journals under the Task link.  A journal can then be created by clicking on the plus icon.

The narrative, reference and description is important to fill in.
Account.....Bad Debt Expense
Type.....Debit

Then fill in the amount.
This line reflects the bad debt as an expense in the organisations profit & loss account.

On the second line of the journal
Account....Bad Debt Provision
Type...Credit
Then fill in the amount.  
This line reflects the bad debt as a liability in the organisations balance sheet.
It is important that the amount on the debit and credit entry above match as Yendo will not allow  you to save the journal unless both entries balance.

The bad debt provision amount in the balance sheet is reviewed regularly/annually usually at the organisations financial year end and the bad debt provision in the balance sheet is either increased (debit bad debt expense in profit & loss account and credit bad debt provision in balance sheet) or reduced (credit bad debt expense in profit & loss account and credit bad debt provision in balance sheet)

The second type of bad debt is a Specific Bad Debt and this is where specific debtor/accounts receivable amounts are  not collectable.  The journal for this entry is to debit the profit & loss account and to credit the accounts receivable account. In Yendo this is done again by using the Journals function under Task link. The first line of the journal is as above ie.
Account...Bad Debt Expense
Type....Debit
Then fill in the amount.
This line reflects the bad debt as an expense in the organisations profit & loss account.

On the second line.
Account.....Accounts Receivable
Type....Credit.
Then fill in the amount.
This line reflects a reduction in Accounts Receivable in the organisations balance sheet.
It is important that the amount on the debit and credit entry match as Yendo will not allow you to save the journal unless both entries balance.