Reporting services not paid - Cash Basis S-Corp

[dude7707]

S-Corp - Cash Basis - performs services in 2021 for customer, not reported as income, they use a clearing account.

In 2022, they w/off to Bad Debts since unable to collect as of EOY in 2022.

This cannot be done, since they are CB, therefore cannot expense, so how would this be reported?

1.  Reclass to Other Asset and call it what?

Or is there another option?

[dkh]

 Debit to Bad Debts  - Credit to ?       

reclass the bad debt to wherever they did the credit     

[dude7707]

After further review, the income was reported in 2022, therefore, when they w/off in 2022 to Bad Debts net affect is Zero...........this matter is closed or you could just DR to respective income accounts as DKH suggested.

[qbteachmt]

"This cannot be done, since they are CB, therefore cannot expense, so how would this be reported?"

But they have expensed it, from the perspective of Costs. Labor and materials, overhead, etc. What you are asking is, "Can they write off lost Profit?" The answer is, you cannot write off what you never wrote on.

A CB entity would have the gross income as AR.

The write off would clear the AR, and offset the income, the same as you see on the tax form = Allowances, refunds and/or discounts (contra-income). Because that's what this became.

And AR is essentially a Revolving current asset clearing account. So, they already have everything that would be needed.

[dude7707]

So since the Income was reported in 2022 and now they have w/off to Bad Debt to clear the clearing account (A/R), which would be the correct method in reclassing the Bad Debt expense in 2022?

1.  Dr Income - Orginally reported to.

         Cr.  Bad Debt

Or

2.  Leave as is Bad Debt.

[IRonMaN]

Cash basis entities don't have bad debts.

[qbteachmt]

Unpaid AR isn't debt. There is no Lender/Borrower note.

I explained what it is: and offset the income, the same as you see on the tax form = Allowances, refunds and/or discounts (contra-income). Because that's what this became.

There might have been a reason for CB reporting unpaid sales, such as sales tax consideration, some inventory or excise fee item, etc. The point is, this lost Asset (the expectation of money) is now a fully discounted sale.

Otherwise, one would have to understand more about why they reported it as income, and why they decided to carry it as asset other than open AR.

[dkh · Accepted solution]

@dude7707    yes option 1