How to Record a Loss from Supplier Insolvency (Supplier Default)
Accounting for the loss of customer prepayments when a supplier (e.g., an airline or hotel) goes out of business before the trip occurs.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Loss on Supplier Default / Bad Debt | Expense (+) | 25,000.00 | - |
| Prepaid Supplier Costs (Allotments/Deposits) | Asset (-) | - | 25,000.00 |
💡 Accountant's Note
If a travel operator has paid a hotel in advance and that hotel goes bankrupt, the 'Prepaid Asset' is no longer recoverable. The firm must write off the asset immediately. This is a common and painful risk in the travel sector (e.g., the Thomas Cook collapse). If the operator is legally required to refund the customer out of their own pocket, a separate 'Refund Liability' may also need to be recognized.
Practitioner & Systems Framework
💻 ERP Architecture
Record this as a 'Special' or 'Non-recurring' operating expense. If the firm has 'Supplier Default Insurance,' the recovery is recorded separately once the claim is approved.
⚠️ Audit Flags
Delayed write-offs. Firms often wait too long to write off defaulted suppliers in hopes of a 'rescue' that never comes. Auditors check for news of airline/hotel closures as triggering events for impairment.
📄 Required Documentation
Notice of Bankruptcy/Liquidation, original wire transfer confirmation, and the legal assessment of recovery probability.
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.
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