The Bad Debts

The bad debts usually refers to accounts receivable that will not be collected. It means that you mention your receivables as uncollectable.

For each countries have their own regulations regarding this process. In Turkey you need to start legal action against debtor in Turkey or in debtor’s country.

What are the two methods of recording the bad debts expenses?

Some of the countries give two options to companies to define their uncollected debts as bad debts. One of them is “write off” and the other one is “allowance method.”

In the first option you need to report this debts on company’s income statement when a customer’s account is actually written off.  While taking this action there is no contra asset account such as Allowance for Doubtful Accounts. You need to record in which they become irrecoverable or when the debtors seem to not to pay their debt. Also you have to deduct from the debtors in the balance sheet since they are not recoverable.

The second option is allowance method. In this option you may record an adjusting entry at the end of each accounting period for the amount of the losses instead of this receivable. With this method you will create an expense account for your bad debts in your accounting.

You may recover any amount if you have already stated one of these actions. If you get any amount from debtor for your bad debts, then you can change your records for the collected amount and rest of the amount must be stated as bad debt as before.

Basicly there is only one difference between Bad Debt and Doubtful Debt. Bad debt is you have officially written off as uncollectable. But the money you have you predict that it will be uncollectable and turn into bad debt.

Turkish Regulations allow you to choose one of these methods. As I stated in the first sentences of this article you need to start legal process if you would like to define your receivables as bad debt.

If you would like to set your debts as doubtful debt, you may wait debtor’s payment patiently until you will define them as cleared or bad debt.