Bad Debt in cash basis report


N

npreston

How should you handle a real loss due to a bad debt for a cash basis
business?

As a small company, we maintain an inventory of repair parts. If we
perform a repair and use inventory parts and return the product to the
customer expecting payment within terms and the customer defaults, we
have then lost the value of our inventory items in addition to not
receiving the other income.

This lost inventory cost represents a real loss that must be recorded
for tax purposes.

How should that be handled if the IRS does not permit a 'bad debt' for
a cash basis taxpayer?




From: "Laura" <inva...@sample.invalid> - Find messages by this author
Date: Sat, 23 Apr 2005 18:03:50 GMT
Local: Sat,Apr 23 2005 2:03 pm
Subject: Re: Help on Bad Debt
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This depends on whether you are Cash or accrual basis. For cash basis
you
would post the Debit to Income instead of the Bad Debt expense. Per the
IRS:
A "cash method" taxpayer should not have a bad debt expense because
he/she
has never received payment for the services that have already been
rendered.
Thus, no income has been reported on such services.
 
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L

Laura

How should you handle a real loss due to a bad debt for a cash basis
business?

As a small company, we maintain an inventory of repair parts. If we
perform a repair and use inventory parts and return the product to the
customer expecting payment within terms and the customer defaults, we
have then lost the value of our inventory items in addition to not
receiving the other income.

This lost inventory cost represents a real loss that must be recorded
for tax purposes.

How should that be handled if the IRS does not permit a 'bad debt' for
a cash basis taxpayer?
You should check with your accountant as to whether or not you should be a
cash or accrual basis. Any company that has an inventory should be on an
accrual basis not a cash basis.

In a cash basis company there is no such thing as bad debt as I stated back
in April. You never received the cash so you can not claim any income and
therefore there is no loss.
 
N

Neil Preston

There is in fact a loss if someone takes some of your inventory and does not
pay for it.
 
G

Golden California Girls

If you have inventory, you have shrinkage.

Maybe you answer?
 
Z

Z Man

Neil Preston said:
There is in fact a loss if someone takes some of your inventory and does
not
pay for it.
Your loss will be reflected in Cost of Goods Sold ("CGS"). Here's how it
works: when you prepare your tax return, you will have a CGS section. CGS
will be computed by taking your beginning inventory, adding Purchases, and
deducting your Ending Inventory. If you have less ending inventory because
of theft, your CGS will be higher. CGS is an expense that will be reflected
in your Net Profit. Thus, you will get a tax benefit from the inventory
shrinkage by virtue of your CGS being higher, resulting in your taxable
profit being lower.

And, companies that have Inventory are required to be on the accrual basis,
as least with respect to accounting for their inventory.
 
A

Allan Martin

How should you handle a real loss due to a bad debt for a cash basis
business?

As a small company, we maintain an inventory of repair parts. If we
perform a repair and use inventory parts and return the product to the
customer expecting payment within terms and the customer defaults, we
have then lost the value of our inventory items in addition to not
receiving the other income.

This lost inventory cost represents a real loss that must be recorded
for tax purposes.

How should that be handled if the IRS does not permit a 'bad debt' for
a cash basis taxpayer?
The uncollected sales proceeds are not deductable, however all other costs
incurred like the cost of the items sold are.
 
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N

Neil Preston

So the question becomes: how best to work within Quickbooks to properly
record the bad debt so that that the cost of the lost inventory shows up in
the correct account on a cash basis report.
 
Z

Z Man

Neil Preston said:
So the question becomes: how best to work within Quickbooks to properly
record the bad debt so that that the cost of the lost inventory shows up
in
the correct account on a cash basis report.
Please refer to my prior response. In short, the lost inventory becomes an
element of CGS, which reduces profit. This is the case regardless of whether
the cash or accrual basis is used. Clear?
 
N

Neil Preston

The concept is clear enough.... I'm referring to the mechanics of making the
entries in QB so that the debt is cancelled and the lost inventory is
accounted for.
 
Z

Z Man

Neil Preston said:
The concept is clear enough.... I'm referring to the mechanics of making
the
entries in QB so that the debt is cancelled and the lost inventory is
accounted for.
For accounting purposes, it is:

Debit "Ending Inventory" (B/S)
Credit "Ending Inventory" (P&L)

If you are running a perpetual inventory system through QuickBooks, I cannot
assist, as I am not familiar with that module. Possible someone else can
jump in and help.
 
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D

Denise

or in other words...

however you record the sale when you ship to customer, you would
reverse via journal entry, for example:
Sale: Debit AR, Credit Inventory
Payment received: Debit Cash, Credit AR
No payment received: Debit Materials (P&L), Credit AR

Also, keep in mind that it would only be the cost of the inventory
item, not the sales price that would be recorded.

Hope that helps. Denise
 

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