Re: Proper way to handle bad debts

Subject: Re: Proper way to handle bad debts

From: John Locke <..hidden..>

Date: Sun, 09 Feb 2014 16:10:04 -0800

Hi, Chris,

On 02/09/2014 03:05 AM, Chris Travers wrote:

On Sat, Feb 8, 2014 at 10:08 PM, John Locke <..hidden..> wrote:

Hi,

For quite some time I've been handling bad debts by receiving cash into
a Bad Debts expense account. This works fine for accrual based
reporting, but we still use cash reporting for the IRS, and doing cash
flow projections.

To be honest, some of the decisions here may be beyond my accounting expertise. You may want to run some of them by your accountant.

If I were making the decision free of any authority and just based on accounting principles, I would probably make the bad debts account a contra revenue account. There are a couple reasons for this, but basically bad debt effectively might as well never have been earned. It isn't money spent or revenue expended, and therefore typically taxes that tax gross income (like B&O tax in Washington State) make bad debt deductible while expenses typically would not be.

Yes, this is exactly what I've done -- reported the full revenue, and then there's a field for deducting bad debt. I've been doing that on an accrual basis, mainly because that's what I have had available in LSMB...

That sounds like a good approach.

If you had to, I suppose you could list it as an equity account, but then it will appear on your balance sheet.

A better approach might be to modify the cash_impact view and cash basis report to specifically exclude contra-income entries in 1.4. I don't see a better way to do this for 1.3 though.

Well, there's not any cash reporting in 1.3, so that's not an issue ;-)

That sounds like an appropriate solution.

Cheers,

John Locke

http://www.freelock.com

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