Whenever a customer invoice is tagged as uncollectible this means that the amount receivable is not going to be received and is converted into a bad debt. If an invoice is declared as bad debt invoice it is very necessary to write it off as if this is not done the business will carry a very high number of account receivable balance that will result in overstating the number of invoices that are eventually be converted into cash. There are two basic methods of writing off bad debt. These methods are listed as under:-
Direct Write off Method
Provision Method
Direct Write off Method
In this method the owner of the business directly charge an invoice as a bad debt and adds the invoice in bad debt expense account. This is done when it becomes certain that the invoice is not going to be paid. The Journal account is debited with the bad debt expense account and the account receivable account is credited with the amount of the invoice. If the invoice also contains sales tax the sales tax payable account is also debited.
Provision Method
In this method doubtful accounts are maintained for the invoices for which a seller thinks are not going to be paid. The Journal entry of the doubtful accounts is debited where as the accounts receivable account is credited with the same amount. Again the sales tax payable account is also debited if the original invoice also contains sales tax in it.