write off receivables in Sage 50 CA

Help, 

Here is our situation: 

An old sale invoice became uncollectable, our accountant made a year end adjusting journal: 

1xxx: Allowance for doubtful accts: CR 10,000; 

5xxx: Bad Debt Expense                 DR: 10,000; 

But, this invoice is still in our system, still in receivable. should we write off this invoice form receivables? how to write off this invoice from receivables?

Appreciate your helps !

Judy

  • 0
    The answer to your question is 'it depends'. To explain why, I have to dip briefly into accounting theory.

    An allowance for doubtful accounts is an adjustment, FOR FINANCIAL STATEMENT REPORTING PURPOSES ONLY, of the value of accounts receivable. It is basically meant to say "Our A/R list says that our customers owe us $$$$$, but we think that there will probably be collection problems on some of that money, so we estimate that our actual collections will only be $$$". The adjustment amount can be determined by identifying specific problematic customer accounts, but it doesn't have to be - in larger businesses, it may well be determined based on statistics about past collection rates, the current state of the economy, etc.

    So, you should record the adjustment given by the accountant. That is a given.

    Now, you're into 'it depends' territory. You (or your manager) need to decide if it is time to actually write off the specific receivable or receivables that have been identified as problematic. This is a management or bookkeeping decision, and can be based on gut feeling, company policy.... it varies by business. The fact that a particular receivable has been used as part of the year-end allowance for doubtful accounts calculation is an indication that you might consider actually writing it off, but it does not mean that you HAVE to do so. You might prefer to leave the receivable on the books until you are completely certain you won't collect, whereas your accountant is setting up the allowance based on a much lower threshold - you want to write off BAD debts, whereas the accountant wants to flag DOUBTFUL accounts.

    When you decide to write off a receivable, you also need to decide if you can undo some of the GST/PST that you formerly charged to the customer and remitted to the government. GST/PST recovery on bad debts is not a given - it depends on how diligently you tried to get the $ from the customer.

    IF YOU DECIDE TO WRITE OFF A RECEIVABLE, there are two ways to do it.

    The first way is very easy, but doesn't put any 'written off' flag in your A/R system and doesn't allow for any GST/PST recovery. To do this, just record a receipt on account to clear out the bad invoice(s), and then do a general journal entry to credit your bank or cash clearing account for the amount of the 'payment', and debit your bad debt expense by the same amount.

    The second way is slightly harder, but does put a 'written off' flag in your A/R system and does allow you to reduce GST/PST on sales. To do this, record an invoice (dated today) showing negative 'sales' (code to your bad debt expense account) and negative GST/PST. You may wish to use a special invoice # or series of #'s such as W/O 1, W/O 2, etc. The invoice total should equal the amount you are writing off. Then, record a 'receipt' from the customer showing them paying both the original invoice, and the negative invoice. The invoice total will be zero.

    Either method will leave your bad debt expenses overstated, because you will have recorded the expense once based on the accountant's entry and once based on the actual write-off. If you are preparing income statements throughout the year, you should probably fix this by reversing the accountant's adjustment ON THE FIRST DAY OF THE CURRENT FISCAL YEAR. Otherwise, don't worry about it - this is normal, and will be automatically corrected when the accountant sets up the next year's allowance for doubtful accounts.