Non-current assets are vital for any organization, including those in the human resource sector, as they represent long-term investments that support operational capacity. Maintaining an accurate non-current assets register ensures proper tracking, valuation, and control of these assets, which is critical for financial reporting and compliance with accounting standards in Kenya. Human resource professionals must understand how to determine the costs of these assets accurately, as this affects budgeting, depreciation, and overall asset management. This chapter focuses on the principles and procedures for determining asset costs in line with accounting standards applicable in Kenyan workplaces.

7.1 Bad debts written off

A bad debt is an amount owed by a credit customer that the organisation has concluded it will never collect. Writing it off means removing the customer's balance from the books and charging the loss to the profit and loss account, so that receivables are not overstated and profit is not overstated. A debt is usually written off when the customer has died, gone out of business, been declared insolvent, cannot be traced, or has refused to pay and the cost of legal action is more than the amount owed. Example: a hardware shop in Eldoret finds that a contractor who owes Ksh 45,000 has closed down and left no address, so the debt is written off as bad.

The estimating of future bad debts through a provision is covered in 7.2, and the adjustment of receivable balances in 7.3, so this topic deals only with debts that have actually been judged irrecoverable.

7.1.1 Circumstances leading to a bad debt

• Insolvency or bankruptcy: The customer cannot pay, and the receiver or trustee offers little or nothing to creditors.
• Death of the customer: No estate or relative is liable, or the estate is insufficient.
• Customer cannot be traced: The customer has moved and left no forwarding address.
• Closure of the customer's business: The business has collapsed and has no assets to be recovered.
• Disputes and refusal to pay: The customer disputes the amount, and recovery through the court would cost more than the debt.
• Debt time-barred: The period within which the law allows a claim has expired.
• Weak credit control: Credit was given without checking the customer's ability to pay.

7.1.2 Procedure for writing off a bad debt

1. Follow up the debt: Send statements, reminders, letters and demand notices, and keep copies of every contact.
2. Investigate the customer's position: Check whether the customer can still be traced and whether any assets exist.
3. Decide that recovery is unlikely: The credit controller confirms that all reasonable steps have failed.
4. Obtain authority: The finance manager or the board approves the write-off, since it reduces profit and the sum may be large.
5. Prepare the journal: Write the entry with the customer's name, the amount and a clear narration.
6. Post to the ledger: Credit the customer's account in the sales ledger and debit the bad debts account.
7. Update the debtors records: Remove the balance from the receivables list and the sales ledger control account.
8. Keep the file: The authority, correspondence and journal are retained for audit and for any later recovery.

7.1.3 Accounting entries for bad debts written off

When the debt is written off, the customer's account is closed and the loss is recorded as an expense.

Debit Bad debts expense

Credit Customer's account (sales ledger)

Example: the Eldoret hardware shop writes off Ksh 45,000 owed by the contractor, J. Kamau.

Journal: Dr Bad debts 45,000; Cr J. Kamau 45,000; narration: being amount owed by J. Kamau written off as irrecoverable.

J. Kamau account

Bad debts account

At the end of the year the total of the bad debts account is transferred to the profit and loss account, and the account starts the next year empty.

7.1.4 Bad debts recovered

Sometimes a customer pays a debt that was written off earlier. The debt is first reinstated, so that the customer's account shows the payment and the history, and then the receipt is recorded.

Step 1, reinstate the debt: Dr Customer's account; Cr Bad debts recovered

Step 2, record the cash received: Dr Bank; Cr Customer's account

Example: a school in Nyeri recovers Ksh 12,000 from a parent whose fees were written off in an earlier year.

Journal 1: Dr Parent 12,000; Cr Bad debts recovered 12,000

Journal 2: Dr Bank 12,000; Cr Parent 12,000

Bad debts recovered is shown as income, or deducted from bad debts expense, in the profit and loss account of the year of recovery.

7.1.5 Partly recovered debts

If a customer in insolvency pays part of what is owed, only the amount that remains unpaid is written off.

Example: a contractor in Thika is owed Ksh 80,000 by a customer who is declared bankrupt. The receiver pays 40 cents in the shilling.

Formula: amount received = debt × rate of payment

Substitution: 80,000 × 40 ÷ 100

Result: amount received = Ksh 32,000

Formula: bad debt = debt − amount received

Substitution: 80,000 − 32,000

Result: bad debt written off = Ksh 48,000

Journal for the receipt: Dr Bank 32,000; Cr Customer 32,000

Journal for the write-off: Dr Bad debts 48,000; Cr Customer 48,000

7.1.6 Effect on the final accounts

• Profit and loss account: Bad debts are an expense, so net profit falls by the amount written off, and bad debts recovered raise it.
• Statement of financial position: Trade receivables fall by the amount written off, because the asset no longer exists.
• Sales not reversed: The original sale remains in the sales account, since the sale took place. The loss is shown separately as an expense.
• VAT: Where the supply was subject to VAT, the supplier may be able to claim relief on the bad debt under the VAT rules, subject to the conditions of the Kenya Revenue Authority.
• Tax: Only debts that meet the tax authority's conditions are allowed as deductions, so accounting write-offs and tax treatment may differ.

Example: a dairy cooperative in Nyahururu has a gross profit of Ksh 900,000, expenses of Ksh 400,000 and writes off bad debts of Ksh 60,000.

Formula: net profit = gross profit − expenses − bad debts

Substitution: 900,000 − 400,000 − 60,000

Result: net profit = Ksh 440,000, which is Ksh 60,000 lower than before the write-off

7.1.7 Worked example with ledger entries

Example: a hotel in Naivasha has these receivables at 31 December, before writing off.

Management decides that the Ksh 40,000 owed by Mwangi Events and Ksh 25,000 owed by Kilimo Supplies are irrecoverable, since both businesses have closed.

Journals: Dr Bad debts 40,000; Cr Mwangi Events 40,000, and Dr Bad debts 25,000; Cr Kilimo Supplies 25,000

Total bad debts: 40,000 + 25,000 = Ksh 65,000

Receivables after write-off: 150,000 − 65,000 = Ksh 85,000

Effect on profit: expenses rise by Ksh 65,000, so net profit falls by Ksh 65,000.

7.1.8 Preventing bad debts

• Credit vetting: Check references, bank details and past payment history before granting credit.
• Credit limits: Set and enforce a limit for each customer.
• Clear terms: State the payment period and any interest on late payment on invoices and contracts.
• Prompt invoicing and statements: Send them regularly, and follow up overdue accounts early.
• Ageing analysis: Review debts by age so that slow payers are identified before they become bad debts.
• Deposits and security: Ask for part payment in advance or collateral from risky customers.
• Debt collection action: Use reminders, payment plans, collection agents and, where worthwhile, legal action.

Chapter Summary

This chapter examined the process of maintaining a non-current assets register, starting with how to determine the costs of assets in accordance with accounting standards, ensuring all relevant expenses are included for accurate valuation. It then explored the methods of depreciation computation, detailing how to allocate the asset’s cost over its useful life systematically. The chapter also covered the proper recording of depreciation following accounting guidelines to reflect the asset's consumption accurately. Further, it explained the accounting treatment of depreciation, including its impact on financial statements. The acquisition of non-current assets was discussed, emphasizing the need for proper documentation and valuation at the point of purchase. Disposal procedures were outlined, focusing on recognizing gains or losses and updating the asset register accordingly. Finally, the chapter addressed determining asset balances to maintain accurate and up-to-date records for effective asset management.