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Bad debts treatment

Bijay Agarwal (CA FINAL STUDENT) (98 Points)

16 March 2021

I have a query regarding bad debts.
For example
A party is not ready to pay the amount against the sales. Now how to close the balance outstanding in the ledger of the party.
If I created a bad debts expense acc and credited the party ledger.
Is it the correct method or need to create a provision first.?
Will it affect the sales? If yes, then will it match with the GST turnover and 26AS.?
Help me with the correct solution with the journal entries.

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3 Replies

Saurabh Dwivedi (Article Assistant) (23 Points)
Replied 16 March 2021

Debit Bad Debts account and Credit the Party's account.

It will not have any bearing upon sales, GST turnover or 26AS.

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Amit Potadar (Consultant) (135 Points)
Replied 16 March 2021

Hi,

If you are talking about registered company then you have to make provision before writing off, if its a sole proprietor or Firm then write off directly.

Matching with GST Turnover - This issue arise in case if you are offsetting the balance by Dr or Cr notes anyhow bad debts will be shown under indirect expenses. you need to show this in 5O in GSTR-9.

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CA. Sourav Sarkar (Chartered Accountant ) (24583 Points)
Replied 16 March 2021

First of all create a provision for bad debt.

Provision for bad debt a/c dr
to Bad debt a/c

GST turnover should be related to the turnover you have shown in returns because gst turnover and in financial statements turnover there should be mismatch as per different principles of both the aspects. But bad debt should be required to shown in annual return.

In 26AS there will be no effect.