Journal Entry for Bad Debts
Not all debtors pay their dues every time. Partially or fully irrecoverable debts are called bad debts. Accounting and journal entry for recording bad debts involves two accounts “Bad Debts Account” & “Debtor’s Account (Debtor’s Name)”.
Bad debt is a loss for the business and it is transferred to the income statement to adjust against the current period’s income.
Journal entry for bad debts is as follows;
|Bad Debts A/C||Debit||Nominal||Debit all Losses|
|To Debtor’s A/C||Credit||Personal||Credit the giver|
(Amount written-off as bad debt being transferred to bad debts account)
|Bad Debts A/C||Debit the increase in expense|
|Debtor’s A/C||Credit the decrease in asset|
The closing journal entry for bad debts would be as follows;
|Profit and Loss A/C||Debit|
|To Bad Debts A/C||Credit|
(Transferring bad debts to the profit an loss account)
Related Topic – Difference Between Debtors and Creditors
- Recommended online courses in accounting from UDEMY
- Recommended online courses in accounting from Coursera
Bad Debts Shown Inside a Financial Statement
Related Topic – Provision for Doubtful Debts
Example – Journal Entry for Bad Debts
Unreal corp was declared insolvent this year and an amount of 70,000 is to be shown as bad debts in the books of ABC Corp. Show accounting for bad debts in this case.
In the books of ABC Corp.
|Bad Debts A/C||70,000|
|To Unreal Corp’s A/C||70,000|
(70,000 written-off as a bad debt being transferred to bad debts account)
|Profit and Loss A/C||70,000|
|To Bad Debts A/C||70,000|
(Transferring 70,000 bad debts to current income statement)