A peer student asks your advice for how to record a bad debt. Which one of the following would you NOT suggest they do?
Group of answer choices
Check if a bad debt expense account has been created with the account type 'Expenses'
Add a credit note to the related invoice
Add a payment to the related invoice through 'bad debt expense' account
Reduce the price on the related invoice price down by the bad debt amount
I would NOT suggest reducing the price on the related invoice down by the bad debt amount. Instead, the proper way to record a bad debt is to:
- Check if a bad debt expense account has been created with the account type 'Expenses' - This is important to ensure that the accounting system is set up correctly.
- Add a credit note to the related invoice - This can be a way to adjust the invoice balance, reflecting the uncollectible amount.
- Add a payment to the related invoice through 'bad debt expense' account - This involves debiting the 'Bad Debt Expense' account and crediting the corresponding receivable account to recognize the loss.
Reducing the invoice price directly doesn't follow the appropriate accounting principles for handling bad debts and could lead to misrepresentation of the financial statements.
