Bad Debts and Accounts Receivable

Two things happen when you, a seller, offer credit to your vendors or customers: you raise your potential to increase revenue or you increase your chances for potential loss.  By extending credit, your buyers will appreciate the convenience, as well as the ability to pay the debt at a later date.  On the flip side of this appreciation, is that some of your customers may not pay the invoice when it comes due.

A credit sale will increase sales on an income statement and it will increase the amount due from customers…this is an asset on the balance sheet.  But, if the invoice is not paid, it will be reported as a loss on the balance sheet.

Credit losses should be reported as soon as possible for financial statements.  They should be reported as late as possible when it comes to income tax purposes.

David W Huff, CPA, PFS, MS is a partner at Person CPA Group. He provides clients with tax preparation and consulting services, accounting services, retirement plan and benefit consulting, accounting software technical support and training, and management advisory services. His specialty is helping new businesses organize their operations to maximize tax savings and move quickly from start-up to profitability.  You can reach David by email at: david@personhuffcpa.com