Bad Debts Recovered Are Recorded Assignment

If you cannot get payment from a customer, write off the amount he or she owes you and the sales tax on it as bad (uncollectable) debt. There are two parts to this procedure: writing off the bad debt, and then clearing it from your Accounts Receivable.

  • Go to the Customers menu and select Create Credit Memos/Refunds.

  • In the Customer:Job drop-down list, select the name and correct job of the customer who did not pay you.

  • On the first blank line in the detail area, select your Bad Debt item.

    If you don't have a Bad Debt item yet...

    1. Choose <Add New> from the Item drop-down list.

    2. In the Type field, choose Other Charge.

    3. Name the item "Bad Debt" or something similar.

    4. (Optional) Enter a description.

    5. Leave the Amount or % field as 0.00.

    6. Click the Tax Code drop-down arrow and select E.

    7. Click the Account drop-down arrow and choose an expense account such as Bad Debt Expense.

      If you do not have a suitable expense account, choose <Add New> and set one up now.

    8. Click OK.

    You only need to create this item once.

  • If you receive a warning that this item is associated with an expense account, click OK.

  • Enter the net (before-tax) amount of the bad debt in the Amount column. Example

    Suppose the original charge to the customer was $100 plus $6 GST and $8 PST. Even though the invoice total was $114, you enter $100 in the Amount column.

  • Enter the sales tax code that was used in the original invoice or sales receipt in the Tax column.

    If there were multiple sales tax codes on the original invoice or sales receipt, enter several Bad Debt items on different lines of the form. Give each a different tax code. Then for each tax code, enter the total for the items that had that tax code.

    When you are finished, the after-tax amount on the Credit Memo should be the same as the original transaction.

  • Click Save & Close.

  • In the Available Credit window, select Apply to an invoice.

  • The invoice for which you created credit memo should be selected automatically. If it isn't, click the invoice in the checkmark column to select it.

  • Click Done.

  • The bad debt is transferred from your Accounts Receivable account to your Bad Debt expense account.

    Assignment of accounts receivable is an agreement between a lending company and a borrowing company in which the later assigns its accounts receivable to the former in return for a loan. By assignment of accounts receivable, the lender gets a right to collect the receivables of the borrowing company if it fails to repay the loan in time. The lender also receives finance charges and service charges.

    It is important to note that the receivables are not sold/transferred under an assignment agreement. If the receivables have been transferred, the agreement would be of sale/factoring of accounts receivable. Usually, the borrowing company would itself collect the assigned receivables and remit the loan amount as per agreement. It is only when the borrower fails to pay as per agreement, that the lender gets a right to collect the assigned receivables on its own.

    The assignment of accounts receivable may be general or specific. A general assignment of accounts receivable entitles the lender to proceed to collect any accounts receivable of the borrowing company whereas in case of specific assignment of accounts receivable, the lender is entitled only to collect the accounts receivable specifically assigned to the lender.

    The following example shows how to record transactions related to assignment of accounts receivable via journal entries:

    Example

    On March 1, 20X6, Company A borrowed $50,000 from a bank and signed a 12% one month note payable. The bank charged 1% initial fee. Company A assigned $73,000 of its accounts receivable to the bank as a security. During March 20X6, the company collected $70,000 of the assigned accounts receivable and paid the principle and interest on note payable to the bank on April 1. $3,000 of the sales were returned by the customers.

    Record the necessary journal entries by Company A.

    Solution

    Journal Entries on March 1:

    Cash49,500
    Finance Charge500
    Notes Payable50,000
    Accounts Receivable Assigned73,000
    Accounts Receivable73,000

    Journal Entries on April 1:

    Cash70,000
    Sales Returns3,000
    Accounts Receivable Assigned73,000
    Notes Payable50,000
    Interest Expense500
    Cash50,500

    Written by Irfanullah Jan

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