What is the 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

Journal entry for bad debts expense is as follows;

Bad Debts A/C Debit Nominal Debit all Losses
 To Debtor’s A/C Credit Personal Credit the giver

(Being amount written off from the respective debtor’s account)

Rules applied as per modern or US style of accounting 

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 and loss account)

Related Topic – Difference Between Debtors and Creditors

 

Journal Entry for Bad Debts
Treatment of Bad Debts in the Books of Accounts

 

Bad Debts Shown Inside a Financial Statement

Income statement showing bad debts

Related Topic – Provision for Doubtful Debts

 

Example

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)

 

Bad Debts Adjustment in Final Accounts

Any information related to bad debts that is present outside the trial balance is incorporated before the adjustments in final accounts are concluded.

Without such adjustments being made during the preparation of financial statements, the numbers shown in the firm’s final accounts will not be accurate.

Incorporating bad debts into financial statements

Situation 1 – No adjustment is made when bad debts are included in the trial balance, only the P&L is affected.

Situation 2 – The final accounts are adjusted when bad debts are given outside the trial balance as supplement information. They are called further bad debts.

Account Impact
Profit & Loss A/c Show on the debit side (add to bad debts already written off)
Balance Sheet Show on the “Asset” side (subtract from sundry debtors)

Related Topic – Are Non-current Liabilities Debt?

 

Entry for Bad Debts Recovered

Accepting payment from sundry debtors who have already had their accounts written off as bad debt is called “recovery of bad debts”.

Journal entry for bad debts recovered should reflect that it is treated as a gain for the business as opposed to bad debts written off, which are losses. While recording the money received the debtor should not be credited as in the case of sales.

Journal entry for bad debts recovered is as follows;

Bank A/c Debit Asset Dr. the increase
 To Bad Debts Recovered A/c Credit Income Cr. the increase

Debit (Bank A/c) assuming the recovery was done as a deposit in the firm’s bank account.

Rules applied in the journal entry as per the 3 golden rules of accounting,

Account Type Rule
Bank A/c Personal Account Debit the receiver
Bad Debts Recovered A/c Nominal Account Credit incomes & gains

Related Topic – Treatment of Discount on Debtors in Final Accounts

 

Provision for Bad Debts Journal Entry

Out of the total debtors of a business, there is always a small percentage that is unable to make a payment. To allow for such doubtful and bad debts it is important to create a reserve (as an estimate). Such a provision is called a provision for bad debts.

The journal entry of provision for bad debts would be as follows;

Profit and Loss A/c  Debit
 To Provision for Bad Debts A/c  Credit

(Creating a provision for b/debts by debiting the profit & loss a/c)

Related Topic – Difference Between Bad Debts and Doubtful Debts

 

Short Quiz for Self-Evaluation

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