A Nominal Ledger Journal should be posted to make a provision for the bad debt.
The journal entries should be:
Credit Bad Debt Provision in the Balance Sheet (Gross Value)
Debit Bad Debt in the Profit & Loss (Net Value)
Debit Bad Debt Relief on the Balance Sheet (VAT Value)
This should be done after a minimum of 6 months after the invoice date (or point of supply date, whichever is later).
Note: Please check the current legislation with HMRC.
In Sales Ledger
Create a Sales Analysis code that will debit the Sales Control Account and credit the Bad Debt Account (Balance Sheet).
Post a Credit Adjustment to the Sales Ledger by going to the Sales Ledger.
Click Adjustments.
Click Credit/Reduce Customer Balance.
Using the Bad Debt Provision analysis code, post a Credit Adjustment. The value should be the gross value to be written off.
In Nominal Ledger
Post a VAT Journal (Debit). The journal entries should be:
Contra Account - Bad Debt Relief Account (Balance Sheet)
VAT Contra – VAT Control Account
Debit Account – Bad Debt Relief Account
Send a notification to the customer to let them know that a claimed bad debt relief has been submitted. This must be sent within 7 days of making the claim. An example of the claim document is available on the HMRC website. (www.hmrc.gov.uk).