Q7: What are the journal entries when we recognise a bad debt under the direct write-off method?
When we recognise a bad debt under the direct write-off method, we increase Bad debts expense (DR: increase an expense) and reduce Accounts receivable (both the control account in the general ledger and the customer’s account receivable in the subsidiary ledger) (CR: reduce an asset):
DR Bad debts expense
DR GST collected
CR Accounts receivable
(Write-off of M. Turner’s account as bad)
You will see we also debit (DR) GST collected. GST collected is a liability; our firm has collected GST from its customers on behalf of the government and has an obligation to pay this amount to the government. When we write-off a bad debt we also reduce (ie debit) our liability GST collected because we no longer need to pay the amount of GST to the government that relates to the bad debt we have written off. Under the direct write-off method we write-off bad debts directly against Accounts receivable when we decide a particular customer is not going to pay their account with us.