As much as we hate to think about it, some customers and clients of your business simply won't be able to pay the invoices they owe you. There are a number of reasons for why they may not be able to, but the predominant reason will likely be due to the state of the economy in the wake of the Coronavirus. With that in mind, we at From Red To Black LLC are going to teach you how to account for uncollectable invoices in your bookkeeping.
To start with, we need to classify how you record invoices to begin with. When you provide services for clients or sell them merchandise and expect to receive payment later, it is classified as a receivable. These are entered as a debit to your Accounts Receivable asset, where they remain until the client pays you. Then it transfers into another asset account—most often Cash.
However, when clients cannot pay and you have no means of receiving compensation for services rendered, the receivable becomes an uncollectable receivable. You have to record the loss and remove it from your Accounts Receivables, with small businesses directly writing it off as an expense.
This is done by creating an expense that will be debited by the amount owed, allowing you to credit the Accounts Receivable and reduce the value. In your journal, this would be recorded as:
Jan 1st: Uncollectable Receivables Expense $100
Accounts Receivable—John Doe’s Bakery $100
Now, if by some chance, a client whose account was written off contacts you with the intention of paying back what was overdue, you can reverse the above in order to reestablish the amount owed as a receivable and then collect it in a separate entry:
Jan 30th: Accounts Receivable—John Doe’s Bakery $100
Uncollectable Receivables Expense $100
Jan 30th: Cash $100
Accounts Receivable—John Doe’s Bakery $100
That is the simplest method of recording your uncollectable invoices. Ideally you’ll never want to use it, as it means you are taking a loss for your efforts, but knowing how to record it will keep your books accurate. If you want more helpful advice, feel free to subscribe and stay updated with new posts to our blog. And if you want to see if the services we offer will benefit you, don’t hesitate to Contact Us.
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