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When customers don’t pay… bookkeeping for bad debts

Posted on October 30, 2017

Not receiving payment from customers is painful enough, don’t be penalized further by paying taxes on uncollectible sales!

1)     Record a bad debt expense for the uncollectible net amount. If you have already paid yearly income tax on this amount, you can still record it in the following year and therefore reduce income tax.

2)     After creating the bad debt expense you can now recover the GST paid by creating an Input Tax Credit (ITC) for the amount uncollectable, therefore reducing future GST payable.

3)     In Manitoba, PST is accounted for in the same way as GST and a credit adjustment can be made on the tax return, therefore reducing future PST payable.

Note: Regarding GST and PST, if a portion has been collected at the time you are claiming the bad debt expense, the recoverable amount must be prorated as a percent of the amount uncollectible.

Remember – If after completing the above procedures you now receive payment by the customer, you must reverse each of these amounts on their respective tax returns.