A debt owing to a business that is not expected to be paid is a bad debt.

If we decide that there is no probability of collecting an overdue amount, we need to reduce the balance sitting on that customer's account to zero. We do not want to show a balance owing that in fact will never be recovered because this would be overstating our debtors and therefore overstating our assets. The amount being written off represents a bad debt and so we transfer this balance to the expense account - `bad debts'.

We then need to reflect this expense in our accounts and therefore transfer the balance to the profit and loss account.

The entries are as follows:

Debit : Bad debt account
Credit : Customer's account

Transferring to the final accounts:

Debit : Profit and loss account
Credit: Bad debt account.

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http://www.cliffsnotes.com/study_guide/Estimating-Bad-DebtsAllowance-Method.topicArticleId-21081,articleId-21059.html

http://www.accountingcrosswords.com/accounts-receivable.php

http://www.allbusiness.com/accounting-reporting/expenses-bad-debts/1149982-1.html

http://www.omniglot.com/om/accounting-for-bad-debts.html

http://basiccollegeaccounting.com/difference-between-bad-debts-written-off-and-provision-for-doubtful-debts/

http://www.accaglobal.com/archive/sa_oldarticles/11983