[Question] Ledger accounting for bad debts

[dcs]

Hi,

I own and run a small one man business and use Quick Books to send out the invoices and statements. One of my problems is that the way VAT works, it is in my interests to write-off debts that are old and unlikely to be recovered. However, I (my business) is not so forgiving and I want to continue chasing these bad debtors for payment despite the accounting write-off. My question is, these bad debtors no longer form part of the debtors book in the accounts and therefore I cannot send statements or credit notes from the system, but I still need a way to send statements and track these accounts. The only way I can think of is to open a separate company, but this seems a bit cumbersome. Does someone have any bright ideas or have a neat way of dealing with this?

Thanks in advance!

[Dave A]

If you're going to keep sending statements, setting up a second company just to manage the written off accounts is probably the best way to do it.

Out of idle interest (arising out of the VAT comment) - After what period do you intend writing off the debts in the business accounts?

[CLIVE-TRIANGLE]

Assume "ABC Limited" is the bad customer.
Now open a customer "ABC Limited Bad" and pass the credit note against that instead.
On all reports the second one will sort below the original one and if nothing else, will serve as a reminder to chase it up.

If you have many such debtors, it might be worthwhile to open a second Accounts Receivable account and open the bad account in that control account.

[Dave A]

That's quite an elegant solution, Clive

Just one thing:

Now open a customer "ABC Limited Bad" and pass the credit note against that instead.

With QuickBooks it's pretty important to post a journal rather than a credit note, otherwise the VAT part of the entry goes to the Output Vat section.

[CLIVE-TRIANGLE]

Yep, you are right. Quickbooks to 2012 is somewhat "box" challenged when it comes to VAT. The only issue I have with that is that a journal is not a "VAT" document , but if it does the job better then that's mostly all that matters.

[dcs]

Thanks for the responses! Great to have a site where you know you are not alone.

After reading the responses I re-looked at Quickbooks and found that I could open a second Accounts Receivable account. So I did that and now am hunting for a way to move the bad accounts from the normal Receivables to the Bad Receivables - I will probably have to journalise each transaction as there does not appear to be a different way. The way Quickbooks is structured, there does not appear to be a way to move them.

To answer the other questions, most of my invoicing is recurring either monthly or annually. If I still have not received payment after around six months of chasing I write the total off for VAT purposes - I am not aware of any legal time limit on this. After a year I stop invoicing as well, but not the chasing - ever! As for the UK (and US) means of calculating VAT applied in South Africa, it just confuses me and I have abandoned it in favour of an Excel spreadsheet which for me is quicker and easier (I am administra-phobic). I ignore the quickbooks VAT liability account - it seems to think I must liquidate all my assets to pay VAT.

Thanks once again for the input, it really helps.

[CLIVE-TRIANGLE]

it seems to think I must liquidate all my assets to pay VAT

Legend comment that

[Dave A]

The only issue I have with that is that a journal is not a "VAT" document , but if it does the job better then that's mostly all that matters.

Interesting. Does a bad debt write-off need a VAT document?

I could always produce one in Excel if that's what SARS require, but it seems a rather pointless exercise. My main concern is making adequate notes on why the debt wasn't collected, and that it's properly reported in the Bad Debt section of the Vat return.

[CLIVE-TRIANGLE]

Interesting. Does a bad debt write-off need a VAT document?

I assume not. It is just paranoia on my behalf ...