Find a collection of essays on ‘Debt’ for school students (class 9, 10, 11 and 12). You will find essays, long as well as short, especially written for school and college students.
Writing off Bad Debt (Essay)
An important event that has considerable impact on the profit and loss account of any business is “Writing off debt”.
Several transactions are made on credit and when this is done, there is the risk that some of your suppliers or customers may never pay the debt causing it to become bad. These debts are termed as bad debts and they are an expense to the business. That’s why its so important to to closely watch your assets and liabilities, for those running your own business.
Why Is It Called Bad Debt?
A bad debt is nothing but money which is owed to you by your customers, which you can’t collect despite your efforts.
It’s called bad debt (expense) because it collected even after taking all the efforts to recover the amount.
When Debt Needs to Be Written Off
There are several situations in which customers or suppliers owe your business money. But, it is not always that you need to write off the debt. There are a few situations in which writing off debt is your only option.
These include when a debtor refuses to pay one of a number of receivables, when a debtor refuses to pay a part of an invoice, when the debtor’s business has failed and he is unable to clear a portion of the debt, or when the debtor has filed for bankruptcy.
Usually, this kind of situation usually occurs when your customer has declared bankruptcy or when the total cost of recovering the amount exceeds the amount in debt.
How Does Writing It Off Help?
When your write-off ‘Bad debt’, you’re basically showing that money as a loss for the business, and is said to be an expense for the company.
So basically, you don’t need to pay any taxes on that money (as you haven’t received it)!
The Procedure
Writing off debt impacts the profit or loss of your business. In the accrual system of accounting, debt is posted as an income to the business and hence tax is calculated for it in the accounting period in which it originates. Hence, when debt is written off, the amount has to be charged as an expense to the business. But the good thing about writing off debt is that you could claim a deduction on your income tax for the period during which it is written off.
Debt can be written off as bad debt only in the accounting period in which it becomes noncollectable. It needs to be posted as an expense and when you file your tax returns, you need to provide proof of the debt in the form of a written document. You will also be required to provide proof that you have attempted to collect the debt and that it has become uncollectible. Finally, you should have the necessary account statements to show that the debt has caused an expense to your business.
The steps involved in clearing off the bad debt expense – Determining the Eligibility, Whether its Personal or Business, Documentation in Personal Bad Debts.
Writing off debt has a major impact on any business. Though the money becomes unrecoverable, the good thing is that you can claim deductions on your income tax, which helps you to recover the expenses partially.
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