Bad Debts treatment in Income Tax Act 1961.

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Published: 05th February 2017
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Following articles contents that how can Sundry Receivables can be treat in accounting if they did not received properly in time.

Whenever the case of particulars year in that assessee written off the bad debts Assessing officer can ask the details of the receivables like this:-

1. Invoice of the party
2. Confirmation of payment received if any
3. Service or goods receiving copy
4. payment confirmation
5. Documentation/correspondence regarding recovery of payments

After Assessing officer demanded papers assessee must have submit all the documents to verify their claim of written of bad debts.

However this process is not so problematic because when ever you will get this bad debts written off back from parties you must credit in income side as bad debts written back .

All Sundry Debtors are not always collected in full due to various resons like dispute in total contract value,dispute in rates ,disputes in discount,and bad intentions of sundry debtors,Bad debts is the debts which cannot recover from the parties after certain period or it is doubtful that it will recover or not in near future.before writing off the sundry debtors as Bad debts must keep in minds some of the points that :-

First It assessee has proper documentation regarding recovery of the dues from the parties.
All the evidence with him with supporting documents and assessee tried many times to recover the amounts.
Assessee not given any credit note,discount vouchers of regarding due amount.
Bad Debts can be allow only in the case of written off in the books of accounts.
Without written off in the books of account bad debts not allow after filing of returns in any stage and any case in Income tax Act 1961.

Whenever the case come in scrutiny and assessing officer call the documents regarding the bad debts written off ,assessee must have in position to show all documents to assessing officer
If assessee fails to show all documents assessing officer can disallow the bad debts after proper care.
Proper Entry that should have done in Books is :-

Bad Debts Account Dr 1500.00
To Sundry Debtors Cr 1500.00
Being Amount of Bad debts Written off


There are two methods of Written of Bad debts which are as follows:-


Direct Written Method
In this method, Amount that not received directly written off against income at the time when they are actually determined as bad debts. When debt is determined as uncollectible, a journal entry is passed in which bad debts expense account is debited and accounts receivable account is credited.

In direct written method the entry can be done in like this ways:-
Bad Debts written off account Dr
Sundry receivable account Cr


Bad Debts Allowance Method

Allowance method is a better alternative to the direct write-off method because it is according to the matching principle of accounting.

In allowance method entry can be done like this ways

Bad Debts account Dr
Bad dets allowance account Cr


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