As a business owner, one of the most difficult tasks is managing bad debt and write-offs. When a customer defaults on a payment or becomes insolvent, it can be a major financial setback for your company. In this blog post, we’ll discuss some tips on how to handle bad debt and write-offs in your bookkeeping.
Firstly, it’s essential to understand what bad debt and write-offs are. Bad debt is an amount that is unlikely to be recovered from a customer. Write-offs are the process of removing that amount from your accounts receivable balance, indicating that the customer’s debt will not be paid. It is essential to keep track of these bad debts and write-offs in your bookkeeping so that you can claim them as a tax deduction.
Here are some tips on how to handle bad debt and write-offs in your bookkeeping:
- Create a bad debt policy: The first step is to create a policy for managing bad debts. Your policy should outline the procedures to be followed when a customer defaults on a payment. This will ensure that you have a consistent approach to dealing with bad debts.
- Identify bad debts: You must identify bad debts in your accounts receivable. You can do this by reviewing your accounts receivable aging report regularly. Any overdue invoice that has remained unpaid for a long time is a candidate for bad debt.
- Determine the collectability of bad debts: Before writing off a bad debt, you should assess the collectability of the debt. You may want to follow up with the customer to see if they have any intention of paying. If the debt is not collectible, you can proceed with writing it off.
- Write off the bad debt: Once you have determined that a debt is not collectible, you can write it off. This involves removing the amount from your accounts receivable balance and recording it as bad debt expense. Your accountant can assist you in recording this in your bookkeeping accurately.
- Claim the bad debt as a tax deduction: Finally, you can claim the bad debt as a tax deduction. You should keep all supporting documents, such as the invoice, proof of attempts to collect the debt, and the write-off confirmation.
In conclusion, bad debt and write-offs are an unfortunate reality for any business. However, with a well-defined bad debt policy and proper bookkeeping practices, you can manage the impact of bad debts on your business effectively. If you need assistance with your bookkeeping, consider working with an experienced accountant or bookkeeper who can guide you through the process.