Quick questions on Bad and Doubtful Debts - TCE Accounting (Tasmania)

When a specific debtor is confirmed uncollectable, the amount is removed from debtors and recognised as an expense.

At balance day, prudence says the likely future losses on current debtors should be recognised now, in the period the sales (and profit) were recorded. Rather than naming specific debtors, the business estimates a total and creates an allowance.

The allowance is an estimate, so the business needs a defensible method. Two are common at this level. A percentage of net credit sales applies a rate to the sales figure for the period, on the logic that a roughly constant proportion of credit sales historically goes bad. A percentage of closing debtors applies a rate to the Debtors Control balance after any write-offs, which targets the balance sheet figure directly.

Occasionally a debtor pays after being written off. The write-off is first reversed (debit Debtors Control, credit Bad debts recovered or Bad debts expense, and reinstate the GST), then the cash receipt is recorded normally. This keeps the audit trail intact and reports the recovery as it happens.