Bad debt is money owed to your business that you determine is uncollectable. Writing off bad debt removes the amount from accounts receivable and records it as an expense.
Bad debt is an unfortunate reality of doing business on credit terms. When a customer cannot or will not pay their invoice, you eventually need to write it off as a bad debt expense. This removes the amount from your accounts receivable (reducing your assets) and records it as an expense (reducing your profit). Most tax authorities allow you to claim a tax deduction for bad debts, but the rules vary - some require you to take active steps to collect the debt before writing it off. There are two methods for recording bad debts: the direct write-off method (recording the expense when the specific debt is identified as uncollectable) and the allowance method (estimating uncollectable amounts based on historical patterns and maintaining a provision). The allowance method is preferred under accrual accounting as it better matches the expense to the period. SortBooks helps identify potential bad debts by flagging invoices that are significantly overdue and tracking collection patterns.
SortBooks helps with the bookkeeping behind bad debt by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing bad debt by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
Accounts receivable (AR) is the money owed to your business by customers who have purchased goods or services on credit. It is a current asset on your balance sheet.
An ageing report categorises accounts receivable or accounts payable by the length of time invoices have been outstanding, typically in 30-day buckets (current, 30, 60, 90+ days).
A provision is an amount set aside in your accounts for an expected future liability or expense that is probable but not yet certain in amount or timing.
A write-off is the removal of an asset's remaining value from the books, recording it as an expense. Common write-offs include bad debts, obsolete inventory and damaged assets.
Credit terms are the conditions under which a seller extends credit to a buyer, specifying when payment is due and any discounts for early payment.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.