Writing off Bad Debts

There may be occasions when the business might not be able to collect its debts. This may be due to the dishonesty of a debtor or may be due to the death or insolvency of a debtor.

 

Bad Debts Account   Dr.
  Debtors Account  
(Bad debts written off)  

 

This amount is then written off the books as ‘Bad debts’. It is a loss for the business and thus it is written on the debit side of the Profit and Loss account.

Closing Entry

 

Profit and Loss Account Dr.
  Bad Debts Account  
(Transfer of bad debts to Profit and loss Account)  

Accounting Treatment

Bad debts appear on the debit side of the Profit and Loss account because it is a loss.
Bad debts are deducted from the Debtors in the Current assets in the Balance Sheet.

Recovery of Bad Debts

 Sometime a debts written off as Bad debts may be recovered later on. Cash is coming in thus Cash account is debited whereas ‘Recovery of bad debts’ is credited because it a gain.

Accounting Entries

Cash Account  Dr.
  Recovery of bad debts  
(Being bad debts recovered)  

 

Recovery of bad debts Dr.
  Profit and Loss account  
(Being transfer of recovery of bad debts to Profit and Loss Account)  

Partial Settlement of Debtors

Sometimes, a business might only be able to recover a part of the debts. This means the rest of the unrecovered debts will be written off as bad debts.

Accounting Entries

 

Cash Account Dr.
Bad Debts Account Dr.
  Debtor’s Account  
(Being partial recovery of debts)  

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