What is Bad Debt?

Bad debts are receivables that cannot be recovered. Losses due to bad debts are called bad debt losses or bad debt expenses. In the income statement, bad debt losses are generally classified as sales expenses in operating expenses, and some companies classify it as administrative expenses. There are usually two methods of accounting for bad debts: direct write-off method and allowance method: (1) Direct write-off method: that is, write off the accounts receivable directly in the current period when bad debts occur, and record them as bad debts expenses. This method is relatively simple, but it does not reflect the matching relationship between accounts receivable and bad debt losses in terms of time and quantity, so it does not meet the matching principle. (2) Allowance method: That is, according to the amount of accounts receivable in each period and the different arrears periods, the bad debt losses in each period are estimated on a regular basis and recorded as the current expense and recorded in the allowance account. This method is more complicated than the direct write-off method. This method can not only match bad debt losses with related income, but also help reflect the estimated realizable amount of accounts receivable on the balance sheet at the end of the current period. ^[1]

Bad debt

Bad debts generally occur due to

Establish customer credit system

According to customer

There are generally two methods of accounting for bad debt losses in China.

One is

Review of bad debt provision

The first is to check whether it is extracted according to the prescribed method and proportion, and whether its calculation is accurate;

The second is to review

China's "General Principles of Corporate Finance" stipulates that accounts receivable can only be regarded as bad debt losses if they meet the following conditions:

1. Due to the bankruptcy or death of the debtor, the bankruptcy property or inheritance still cannot be recovered;

2. Due to the debtor's failure to perform its debt repayment obligations for more than three years, it still cannot be recovered.

Except for the above situation, bad debt losses cannot be arbitrarily listed. According to the "Accounting System of the Company Limited by Shares", the method and proportion of withdrawal of bad debt provisions of overseas listed companies and other listed companies shall be determined by the company. Once the method of extraction is determined, it cannot be changed at will. When conducting an audit, be aware of the differences.