16 Nov Cash Basis Accounts Receivable Write Offs
Cash Basis Accounts Receivable Write Offs
When an invoice becomes uncollectible and the books are kept on a cash basis, there are two alternative methods for recording the credit memo.
The first alternative is to create a credit memo exactly the same as the invoice. By virtue of being a credit memo, it will be “reverse” the original entry. The next step is to “link” the two transactions together so they will not continue to appear on aging and open invoice reports. Because the books are kept on a cash basis, the sale was never recorded so this will create a debit and credit in each account with the net effect being zero.
The second alternative is to use a bad debt item. Entering a credit memo with a Bad debts item – the amount invoiced, less sales tax should be entered as a bad debt taxable item so the software will calculate the amount of sales tax. This will eliminate the possibility of not receiving credit back for the sales tax already paid. A taxable code should also be considered for these types of transactions to make completion of the sales tax return more efficient. This item should be coded to bad debt expense. It will still be necessary to “link” the invoice to the credit memo. For cash basis reports, the result is the invoice will show as income and the credit will show as Bad Debt Expense (in the expense portion of the Profit & Loss reort). The next effect on profitability will be zero. The decision comes down to the opinion of the business owner and accountant on how important is having the information highlighted on the face of the report.