Accounting for Bad Debts

One of the unfortunate issues that companies need to deal with at year-end is accounting for bad debts. Bad debts are not an issue for a company that operates on a cash basis; if you haven’t collected the money, then it isn’t included in your income. For companies that keep their books on an accrual basis, however, it is an important part of their year-end process, since you book your revenue as it occurs or is billed out, not when you receive payment. Read More »

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“But my BAD debt isn’t really that bad… is it?”

Unless you get money from customers up-front before you give them the product or service they purchased from you, you will likely get shafted now and then from customers who will never pay.

In spite of your best efforts, these receivables end up getting older and older and you realize that you will never collect from them. Everyday people might call this “hopeless” but in accounting lingo, it’s called “bad debt“.

It’s tempting to just ignore your bad debt. (Hey, no business owner wants to be reminded of a customer who pulled a fast one on them). Unfortunately, doing that will artificially inflate the assets on your balance sheet while also misstating your profit.

But you do need to do something with these numbers! Here’s what to do:

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Tags: Assets, Bad Business, Bad Debt, Balance Sheet, Best Efforts, Business Owner, Call Accounting, Debt Expense, Everyday People, Hey, Income Statement, Liabilities, Lingo, Money, Payables, Receivables, Same Time Period, Spite, Stock