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What is the Journal Entry for Bad Debts?

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/CDebitNominalDebit all Losses
 To Debtor’s A/CCreditPersonalCredit the giver

(Amount written-off as bad debt being transferred to bad debts account)

Rules applied as per modern or US style of accounting 

Bad Debts A/CDebit the increase in expense
Debtor’s A/CCredit 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

 

Journal Entry for Bad Debts

Treatment of Bad Debts in the Accounting Books

 

Bad Debts Shown Inside a Financial Statement

Income statement showing bad debts

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/C70,000
 To Unreal Corp’s A/C70,000

(70,000 written-off as a bad debt being transferred to bad debts account)

 

Profit and Loss A/C70,000
 To Bad Debts A/C70,000

(Transferring 70,000 bad debts to current income statement)

 

Short Quiz for Self-Evaluation

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>Read Journal Entry for Loan Payment