Bad debts and provision for doubtful debts

Bad debts

When a customer's dues are clearly unrecoverable (insolvency, long legal failure), write them off:

Bad Debts A/c                   Dr  25,000
    To Customer A/c                    25,000

Provision for doubtful debts

At year end, estimate the part of remaining debtors that may not be recovered (e.g. 5% of debtors over 180 days):

Profit & Loss A/c (Provision for Doubtful Debts expense)   Dr  40,000
    To Provision for Doubtful Debts A/c                          40,000

In the Balance Sheet, the provision is deducted from Sundry Debtors.

Recovery of a bad debt written off earlier

Bank A/c                        Dr  10,000
    To Bad Debts Recovered A/c (Indirect Income)   10,000

GST point

Writing off a bad debt does not let you reduce output GST already paid. GST can only be reduced through a valid credit note issued within the time limit.