Re: Proper way to handle bad debts

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.

And now I'm finding that when I write off bad debt using this approach,
I have bad debt showing up as an expense on a cash-based PNL report
(using 1.4).

My CPA is not happy with this!

So, couple questions.

1. Is there a different technique I should use to write off bad debt?
2. If not, is there a way to classify the bad debt account so that it is
not listed on a cash-based PNL?

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.

Cheers,
John Locke
http://www.freelock.com

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Best Wishes,

Chris Travers

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