How to write off bad credit

[Doug Laidlaw]

On Saturday 17 January 2009 8:47:35 am Cam Ellison wrote:
> Doug Laidlaw wrote:
> > The OP gave his customer money - a payment in advance, if you like.
> >
> > So the customer became his debtor.  The customer owed money, just as an
> > invoiced customer owes money.  In the books, he is a debtor: credit bank,
> > debit the customer.  There should be a debit in the customer's ledger
> > sheet.
> >
> > So why not write the amount off to bad debts?  Bad debts is an expense
> > account.  At the end of the fiscal year, it is transferred to Profit and
> > Loss, which gets it out of the books.
>
> It really is not a debt: it's payment for goods and services, and thus a
> deductible expense.  You don't want to do anything in the accounting
> that gets in the way of that. You could also think of it as an
> overpayment, which has occasioned most of the discussion on this
> thread.  Both are payables, and any payment made is a credit, not a debit.
>
> Bad debts are receivables that remain unpaid; accounting for them as
> such allows either reducing the income or increasing the expenses.
>
> HTH
>
> Cam
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Good to have an accounting perspective, Cam.    It is a prepayment in one 
sense, although that term is usually applied to matching for example, so much 
of a payment for a year's insurance as applies to the accounting period.  It 
belongs to COGS, like a discount, not to bad debts, which is a financial 
expense.  But for only one payment, will it matter that much?  Hopefully, 
this won't be an everyday occurrence, but we are going to the trouble of 
setting up a special little account (or several) to hold one entry.  If bad 
debts is the wrong place, there is Discount on Purchases.

Decide on the accounting involved, and GnuCash can do the job.  Don't say that 
it is too hard to think through, so let's blame GnuCash.  This is a software 
list.  I would ask the person who is going to prepare the tax return.

Doug.