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Depending on how you create sales invoices in your accounts system, this will determine how you record bad debts in your accounts system. There are two main methods of Sales Invoicing in an accounts system.
1. Sales Invoicing with Stock Items on the Invoice
2. Sales invoicing entered using a nominal code only (also known as batch invoicing)
Method1.
You use stock codes on your sales invoices your invoice may look like this Stock Code
| Description | Qty
| Price
| Total
| 23-AGF-001
| AGF Compressor | 2
| 100.00
| 200.00
|
This is one line from your Sales Invoice and you will send the invoice to your customer with this detail on it. The VAT will be calculated automatically on the invoice
Method 2.
With non stock code or batch invoicing, usually you have sent a handwritten docket with the same details as a computerised stock sales invoice, but when you record the invoice in your accounts system you may enter something like the following;
You use nominal codes using batch entry Nominal Code
| Nominal Code Description
| Net
| Vat
| Gross
| 1001
| Sales of Compressors
| 200.00
| 42.00
| 242.00
|
In this case you record the sales nominal code and not any stock codes.
How to record bad debts
With both methods you will issue a credit note to claim back the VAT you paid out and reduce the sales you made. If you were successful and got back some of the stock you sold to the customer, you would issue a credit note for the goods you got back to the customer.
You also need to set up a stock code called bad debts.
Method 1. Using Stock Invoicing
Example of credit note issued for goods got back
Stock Code
| Description
| Qty
| Price
| Total
| 23-AGF-001
| AGF Compressor
| 1
| 100.00
| 100.00
|
Example of Credit Note issued to write off bad d e b t
Stock Code
| Description
| Qty
| Price
| Total
| BADDEBT
| Bad D e b t
| 1
| 100.00
| 100.00
|
Method 2. Using batch entry
Example of Credit Note recorded for stock received back Nominal Code
| Nominal Code Description
| Net
| Vat
| Gross
| 1001
| Sales of Compressors
| 100.00
| 21.00
| 121.00
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Example of Credit Note for Bad D e b t
Nominal Code
| Nominal Code Description
| Net
| Vat
| Gross
| 4201
| Bad Debts
| 100.00
| 21.00
| 121.00
|
The end result is the same for both methods Your Sales are reduced by 100.00 Your Bad debt charge to the Profit & Loss is 100.00 Your VAT liability is reduced by 42.00 As your sales are lower and you have a bad d e b t expense your taxable profit is now lower IMPORTANT: By recording a credit note you are reducing the balance owed by your customer to zero. They customer will no longer appear on your aged debtors report as being owed. If the customer's business is being closed down by a liquidator and you go and send a statement to the liquidator it will show zero owing. So make sure before you record the bad debt transaction that you have printed a customer statement showing all the unpaid issues due for payment. Make sure the credit note you gave them for the goods is also on the statement. Do not send a statement that shows the credit note for the bad debt portion. How to deal with a bad debt recovered Having written off the bad debt and you manage at a later date to get some money out of the liquidator, then to keep everything correct you need to issue an invoice for the money received. The money received will include VAT so you need to issue an invoice including VAT that adds up to the value of the amount received. There are some laws on when you actually can legally write off a bad debt which you should have a read of. But if you you don't want to wait for a long liquidation process you customers business is going through, the methods above will get you back some of your money quicker. |
