Handling Bad Debt Write-Offs

Cadzow 2000 contains no special procedure to write off a bad debt as the transaction is simply a credit note. However for book-keeping and analysis purposes it is the usual custom to use a special stock code rather than the original stock code. For example, if you sold 4 chairs and later had to write this off you would not simply credit back the 4 chairs as they are not being returned to stock.

To create the appropriate accounts

• Under Stock Control, Analysis Accounts, create an analysis code called BAD DEBT WRITE-OFF. If required, enter the General Ledger sales and purchases account codes (in this case the codes would be the same);

• Under Stock Control, Stock & Services, create a stock code called BAD DEBTS of type “expense” and linked to the BAD DEBT WRITE-OFF analysis account code. Most typically the tax code would be GST, although if you are writing off GST and non-GST items this can be changed at the time the entry is made.

To set up credit note reasons

• Go to Accounts Receivable, Miscellaneous Settings;

• Go to the Credit Notes tab;

• Enter any credit note reasons you require.

To write off a bad debt

• Use Accounts Receivable, Enquiries to open the invoice that requires writing off.

• Make a note of how much of the invoice is to be written off; if it is partly paid then the write off amount will be what is remaining;

• Make a note of the value of GST and non-GST items that are involved;

• Go to the Special menu and choose Create Credit Note;

• Delete each line item so the credit note is empty;

• Add a new line item for the stock code BAD DEBTS and enter the value of the GST items;

• Add a new line item for the stock code BAD DEBTS and enter the value of the non-GST items;

• Check that the total of the credit note matches the value to be written off;

• Go to the Options tab and enter a Reason for Credit Note.

• Commit the credit note with F11 (Commit).

What if the invoice is partly paid and contains a mixture of GST and non-GST items?

If an invoice is completely unpaid then the write-off amount can be taken directly from the items on the invoice. However, if the invoice is partly paid, the write-off amount is less obvious. How do you know which line items the customer has already paid for? Of course this distinction cannot be made. One answer is to apply a proportion.

Suppose you have an invoice for $950.00, comprising $500.00 of GST items and $400.00 of non-GST items ($500.00 + $50.00 GST + $400.00), the customer has paid $200.00 and the remaining $750.00 is to be written off. The proportion of the write-off amount to the total invoice is:

Therefore the GST component is:

and the non-GST component is:

This provides a credit note value of:

If the total is out by one or two cents due to rounding, simply change each line item by one or two cents until the correct value is achieved.

This technique works for both cash-based and accrual-based Business Activity Statement (BAS) reporting. If cash-based, the GST applicable on the original receipt will have been included on a proportional basis already (using this example the GST component of the receipt would be $10.52, ie. 10% of $500 × $200 ÷ $950). The credit note does not contribute any further because it is not a cash entry. If accrual-based, the credit note offsets the GST already included from the invoice on a proportional basis.