Journal Entry for Recovery of Bad Debts
At times, a debtor whose account had earlier been written off by a creditor as a bad debt may decide to pay it back this is called recovery of bad debts. While entering the journal entry for recovery of bad debts it is important to note that it is treated as a gain to the business & that personal account of the debtor should not be credited.
While journalizing for bad debts debtor’s personal account is credited and bad debts account is debited because bad debts written off are treated as a loss to the business and now when the same bad debts are recovered they are seen as a gain.
Journal entry for recovery of bad debts
|Cash/Bank A/C||Debit||Real Account||Dr. What Comes in|
|To Bad Debts Recovered A/C||Credit||Nominal Account||Cr. Income & Gains|
Consequently if the company is not maintaining a provision for doubtful debts, the closing journal entry for bad debts recovered would be
|Bad Debts Recovered A/C||Debit|
|To Profit and Loss A/C||Credit|
Bad Debts Recovered Shown Inside a Financial Statement
Example – Journal Entry for Recovery of Bad Debts
Unreal corp were declared insolvent last year and an amount of 70,000 were shown as bad debts in the books of ABC corp, this year Unreal corp decided to pay cash 70,000 against the same debt.
In the books of ABC Corp.
|To Bad Debts Recovered A/C||70,000|
(Cash received from Unreal corp previously written off as bad debt)
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