Question

How does an increase in bad debt affect a sole trader financial statement

Answer 1

Answer:

It will increase expense, thereby reducing the profit mentioned in the income statement and decrease the current asset (debtor) recorded in the balance sheet.

Explanation:

Bad Debt is an expense that is recorded when it is expected that the customer, who owes a debt to the business, might default in clearing their dues.

As such when the bad debt amount is increased it will result in a rise in expense and therefore the profit, as stated in the profit and loss (income statement) of the sole trader would decrease.

Moreover, it will also decrease the value of trade receivables (current assets) mentioned in the balance sheet. The following entry would be recorded:

Bad Debts (Dr) xxxxx

Trade Receivables (Cr) xxxxxx

Hence, the expenses will increase while the current asset will decrease.