Discussion
I paid a contractor £200 to do some work for me that I then had to cancel before he had started. We allow a £50 fee if we do this, so he owes me £150. I paid him last year but I had hoped to deduct it from work we had planned for this financial year. He wants to work the debt off rather than return the money but the type of work we have has changed and to work the money off would require him to come for retraining which is uneconomical. I don't want to push it with him as I know he will bad mouth me to other contractors who I need to stay on good terms with. We are now reaching the end of the next financial year.
If I decide to write this money off how would I handle that in the accounts? I could just forget it and account as if the work was done but wondered if there were any advantages to showing it as a bad debt or if was obligated to formally try and collect it?
Never been owed money at year end before
The following are the related accounting journals for the scenario as I understand it.
When you paid the guy in advance
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you write the debt off
DR Expense 150 (PL)
CR Debtors 150 (BS)
Note, the above ignors VAT.
HTH
When you paid the guy in advance
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you write the debt off
DR Expense 150 (PL)
CR Debtors 150 (BS)
Note, the above ignors VAT.
HTH
mrmr96 said:
The following are the related accounting journals for the scenario as I understand it.
When you paid the guy in advance
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you write the debt off
DR Expense 150 (PL)
CR Debtors 150 (BS)
Note, the above ignors VAT.
HTH
Sounds complex, but the lines I did understand are:When you paid the guy in advance
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you write the debt off
DR Expense 150 (PL)
CR Debtors 150 (BS)
Note, the above ignors VAT.
HTH
When you write the debt off
DR Expense 150 (PL)
CR Debtors 150 (BS)
Ok, so you are familiar with double entry bookkeeping?
On the balance sheet a debit (DR) is an asset or decrease in a liability.
On the balance sheet a credit (CR) is a liablity or a decrease in an asset.
On the P&L a debit is an expense.
On the P&L a credit is income.
So say you recieve some bank interest, you would DR Bank on the BS (increase asset) and CR Interest income on the P&L (income)
---
When you paid the guy in advance you need to account for the fact that cash has gone out of the business, but now someone owes you something. I.e. you have decrease the cash asset (CR cash) but you now have created the asset of someone owing you work, the prepayment (DR Prepayment). The value of both is £200.
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would account for the expense as a debit to the P&L (cost) and you would reverse out the prepayment asset becasue the guy no longer owes you the work, so the asset of someone oweing you work is gone.
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer you have to recognise the expense of the lost money (DR to P&L £50) but they you no longer expected the guy to do any work for you, you want a refund. Therefore instead of owing you £200 of work you've written the £50 off as an expense and converted the remaining £150 into a debtor as you expect a refund.
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you realise the guy isn't going to pay you, you have to write the debt off, which you say you understand.
DR Expense 150 (PL)
CR Debtors 150 (BS)
---
When all is said and done the net effect has been:
DR Expense (lost retainer) £50
DR Expense (bad debt) £150
CR Bank £200 (i.e. reduce bank as you did pay out the £200)
So the whole cost of the lost £200 ends up as a cost of £200 on your P&L, but it's split between two expense codes because £50 was an agreed deposit write off or whatever, and the remaining £150 is a bad debt written off.
HTH
On the balance sheet a debit (DR) is an asset or decrease in a liability.
On the balance sheet a credit (CR) is a liablity or a decrease in an asset.
On the P&L a debit is an expense.
On the P&L a credit is income.
So say you recieve some bank interest, you would DR Bank on the BS (increase asset) and CR Interest income on the P&L (income)
---
When you paid the guy in advance you need to account for the fact that cash has gone out of the business, but now someone owes you something. I.e. you have decrease the cash asset (CR cash) but you now have created the asset of someone owing you work, the prepayment (DR Prepayment). The value of both is £200.
DR Prepayments 200 (BS)
CR Cash 200 (BS)
If you HAD had the work done then you would account for the expense as a debit to the P&L (cost) and you would reverse out the prepayment asset becasue the guy no longer owes you the work, so the asset of someone oweing you work is gone.
DR Expense 200 (contractor cost or whatever) (PL)
CR Prepayments (BS)
But you didn't get the work so instead you do the following:
When you lose the retainer you have to recognise the expense of the lost money (DR to P&L £50) but they you no longer expected the guy to do any work for you, you want a refund. Therefore instead of owing you £200 of work you've written the £50 off as an expense and converted the remaining £150 into a debtor as you expect a refund.
DR Expense (lost retainer) 50 (PL)
DR Debtors 150 (BS)
CR Prepayments 200 (BS)
When you realise the guy isn't going to pay you, you have to write the debt off, which you say you understand.
DR Expense 150 (PL)
CR Debtors 150 (BS)
---
When all is said and done the net effect has been:
DR Expense (lost retainer) £50
DR Expense (bad debt) £150
CR Bank £200 (i.e. reduce bank as you did pay out the £200)
So the whole cost of the lost £200 ends up as a cost of £200 on your P&L, but it's split between two expense codes because £50 was an agreed deposit write off or whatever, and the remaining £150 is a bad debt written off.
HTH
Eric Mc said:
Or, to keep it simple, Debit the actual payment you made to this chap straight to "Sub-Contractor" costs in the Profit and Loss Account. You may have already posted the payment to that heading anyway.
Normally, Bad Debts Written Off is a heading used for unrecovered sales income.
I'm with Eric on this one.Normally, Bad Debts Written Off is a heading used for unrecovered sales income.
You're reducing the debtor by the full amount, ie the £200. Ignore the £50, there's no need to show it seperately. Credit debtors on the BS (or credit creditors if it's shown as negative balance?), Debit Sub-contractor on the P&L. If you want, you can show the £50 seperately? Alternatively you debit bad debts instead of sub contractors, but like Eric said, it's usually sales unrecovered, the overall effect is the same, you still get tax relief on the full cost that was taxed in the previous year.
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