When debts go bad

Cashflow is the lifeblood of small business.  It's a constant balance between sufficient cash inflow to support your outflows. Non-payment by a customer can have serious impact on most businesses.

A tough economy increases the risk of customers defaulting on their payments, being under financial stress.

It is important for all businesses, as part of their planning process, to analyse their debtors regularly to identify those outstanding debtors who are unlikely to make payment.

"A debt is considered bad when a business has tried to recover the debt and has exhausted all efforts for it to be recovered with no reasonable expectation of payment."

Accounting for a Bad Debt and GST

The GST treatment of writing off a bad debt will depend on the method you use to report GST.

On a Cash Basis, GST collected is only reported once the payment has been received from the customer.   As the customer has never paid the invoice, no GST has previously been reported and therefore your business won't have any GST adjustment to claim back.

If you report on an Accrual Basis, the bad debt adjustment will need to be GST coded as you have already paid the GST when you recorded the sale.  You can make an adjustment on your next BAS (conditions apply) to claim back the GST you previously paid to the ATO for the sale you made but did not receive payment for.

The procedure for writing off bad debts can be complicated.  Please do not hesitate to contact our office to discuss.