Bad Debts

Topic: Bad Debts

A suggested method of handling Bad Debts on Minor Works and Contracts:

The Assumption is that Progress Claims have been made and recorded against the Contract.

However the Client has defaulted on all or part of the Contract. The situation is that a Claim has been posted, thus resulting in a debit to a Debtors Control and credit to Income.

Before posting on a bad debt the follo9wing setup should be performed:

The following maintenance should be performed:

1. Create a Bad Debt Expense Account

In the general ledger screen create a bad debt expense ledger

2. Create a Bad Debt Cost Centre

In the cost centre screen create a new overhead / admin Cost Centre (CC) for Bad Debts.

Link the newly created bad debt expense ledger to this new cost centre.

3. Set Debtor (Client) as a Supplier (Contact)

In the contact screen locate the Debtor (Client) and activate the Supplier setting on the Dates and Keys tab. The Debtor will need a tick on both the Supplier and Debtor setting.

Postings to close Debtor account and write off Bad Debt:

So that the Debtor is cleared and the Bad debt is recorded the following postings need to be entered.

1. To clear the unpaid claims from the Debtor account, enter a Receipt for the full amount outstanding. Use a current date and the Reference of BADDEBT on the receipt.

2.  To record a Bad Debt expense, post on a supplier invoice using the Debtor as the supplier, assign the BAD DEBT cost centre and the Bad Debt general ledger account. Use the same date as used for the receipt. Record a Payment for this invoice using BADDEBT as the reference and use the same Bank as the receipt was entered to.

In the bank reconciliation screen there should now be both a withdrawal item and a deposit item with the reference BADDEBT dated the same, confirm the totals offset each other and mark both lines as reconciled.

At this point the situation in the accounts will have the original income offset by the Bad Debt expense amount.

End of document.