Writing off a bad debt

There may be (hopefully not many) times when a customer fails to pay you. You can write off the invoice as a bad debt and reclaim the VAT six months from the date you made the supply or invoiced the customer (whichever is later). To write off the bad debt you need to reverse the balance of the invoice in the accounts receivable account so that it no longer shows as being owed, record the net invoice amount as a bad debt expense, and reclaim the VAT amount. You do all this in one journal entry.

On 4 October 2011 you invoiced your customer £2,000 plus £400 VAT. On 4 April 2012 your customer still has not paid the £2,400 you are owed and you know you won’t get paid. You make a journal entry (as shown in Figure 18-1) to record the bad debt.