Timing: 00:00:00
You have rendered a bill for £600.00 to your client, Mr. Baker. You have learned that Mr. Baker is bankrupt, but that a payment of 25% in the £ will be received in full settlement of debts, with the remainder written off as a bad debt.
Which of the following represents the accounting entries you should make in respect of writing off the debt?
*Do not deal with the VAT element for the purposes of this question.
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The correct answer is A. When a client like Mr. Baker is bankrupt and a payment of 25% of the owed amount is received, the remaining 75% must be written off as a bad debt. In this case, for a bill of £600.00, 25% amounts to £150.00, which will be received. The remaining £450.00 must be written off. Therefore, you debit the bad debts ledger with £450.00 and credit the client ledger office account to reflect the write-off.
Key Point: Handling bad debts requires accurate accounting to ensure that the solicitor's records reflect the true financial position. When a debt is partially recovered and the rest is written off, the bad debt ledger must be updated to reflect the written-off amount, maintaining compliance with the SRA Accounts Rules and ensuring transparent financial records.
Option B is incorrect because it does not reflect the correct amount to be written off.
Option C is incorrect because it reverses the entries, leading to incorrect records.
Option D is incorrect for the same reason as Option C; it reflects the wrong amounts and entries.
Option E is incorrect because it does not properly account for the bad debt but instead suggests a bank transaction.
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