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) | ||