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Hey guys , wondering if you can help out . If we raise an invoice , but then find that it’s not going to be paid , would we cancel (which I presume would be DR income CR trade receivables) or write off (which I presume would be DR bad debt expense CR trade receivables . Moreover , what would be the treatment if the debtor only paid part of the invoice? Many thanks.
Systems of control should prevent a cancellation. Cancellation would indicate that the invoice was raised incorrectly and would require management level authorisation. In any event to leave a proper paper trail, the appropriate treatment would be:
If the invoice was raised incorrectly, then
Dr: Income
Cr: ReceivableIf the invoice was valid but conditions may exist impairing the receivable, then
Dr: Provision for doubtful debt expense
Cr: Provision for doubtful debt (in the statement of financial position)If there is a clear uncertainty as to the recoverability (for instance due to bankruptcy of debtor), then either
Dr: Provision for doubtful debt (in the statement of financial position)
Cr: Receivableor
Dr: Provision for doubtful debt expense
Cr: ReceivableOne small point: we no longer call it provision for doubtful debt. It is “allowance for receivables”
Can still be called a provision…..the standard prohibits making general provisions. However the term provision is interchangeable with allowance and specific allowances/provisions are allowed.
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