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Bad Debt Write Off

Bad Debt Write Off in ERP system

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Is it incorrect to issue a sales credit note to write off a bad debt and then release the bad debt provision for the same amount (net of VAT). I was advised that it is wrong to reduce the turnover by the value of bad debts.

We are unable to post a journal to the debtor's account and can only issue sales credit notes to sales general ledger codes.

The debt would be written off after 1 year and VAt reclaimed.

Thank you for your feedback.

Replies (6)

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By Paul Crowley
18th Dec 2021 16:07

The bad debt is an expense
The turnover is not reduced
Just a question of making the journals fit to get the correct end result

Sounds as if the (unnamed) software cannot do what needs to be done, and the human must do a workaround

Thanks (4)
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By paulwakefield1
20th Dec 2021 08:03

In the absence of a strightforward way to do it, it looks like you will have to raise a credit note and then journal to credit sales and debit bad debts plus any necessary VAT journals.

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Melchett
By thestudyman
21st Dec 2021 21:27

Sorry if I misread the situation, but why would a credit note be necessary for bad debts? As long as the service has been provided, then you should not be doing a credit note.

I understand there has to be workarounds to account for bad debts in respect for VAt and many software packages do not make this easy - but should not be accomplished using a credit note.

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Replying to thestudyman:
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By paulwakefield1
21st Dec 2021 22:15

It's not ideal but it appears to be the only way the OP's software can handle it. And a credit note posting (not a real credit note of course*) coupled with the necessary journals will achieve the desired effect.

As you say, workarounds are often necessary and this one seems pretty straightforward.

Edit: *to be clear, the system may well generate a credit note which then just needs filing in the recycling pile.

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By carnmores
22nd Dec 2021 12:27

Yes you can use a credit note if it can be posted directly to Bad Debt (provision)

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By samcants
06th Jan 2022 10:38

I've used a system with a similar limitation.

To write off bad debt we would use the cashbook - post a "dummy" receipt to the sales ledger then a dummy payment for the invoice amount to nominal with the entries to corresponding entries to bad debt and VAT control account.

Not ideal but seems simpler than crediting then sorting out the entries.

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