How to write off a debt that will not be paid
When a customer will never pay, the debt stops being an asset. Write the journal that turns it into an expense, with and without VAT.
In this room: 3 tasks, 9 questions
- When a debt is irrecoverable3 questions
- A write-off with VAT3 questions
- After the write-off3 questions
An irrecoverable debt is an amount a customer owes that will never be paid. The customer may be insolvent, or cannot be traced.
The debt is no longer an asset. It is taken out of trade receivables and becomes an expense.
- Debit
- Irrecoverable debts, an expense
- Credit
- Trade receivables, an asset that goes down
Rider Hire owes Marlow Cycles £350 and has closed down. Dev tells Tasha to write the debt off. Ignore VAT on this one.
Answer the questions below
2 more questions follow in this task.
When the invoice had VAT on it, the business owes that VAT to HMRC even though the customer never paid. If the business can claim the VAT back, the VAT account is debited. A question will always say when it can.
Pedal Couriers owes £720, which includes VAT at 20%. Marlow Cycles can claim the VAT back. VAT at 20% is one sixth of the gross amount.
- Debit Irrecoverable debts with the net amount
- Debit VAT with the VAT
- Credit Trade receivables with the gross amount
Answer the questions below
2 more questions follow in this task.
The general ledger shows trade receivables as one total. Each customer also has an account of their own in the sales ledger.
A write-off is entered in both: a credit to Trade receivables, and a credit to the customer's own account. That account then shows nothing owed.
Answer the questions below
2 more questions follow in this task.