What is the Journal Entry for Recovery of Bad Debts?


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 make a payment, this is called recovery of bad debts. While posting the journal entry for recovery of bad debts it is important to note that it is treated as a gain to the business & that the debtor should not be credited as in case of sales.

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 they are recovered it is seen as a fresh gain.

Journal entry for recovery of bad debts is as follows;

Cash or Bank A/C Debit Real A/C Dr. What comes in
 To Bad Debts Recovered A/C Credit Nominal A/C Cr. income & gains

Debit (Cash or Bank) depending on how the money is received

Rules applied as per modern or US style of accounting 

Cash/Bank A/c Debit the increase in assets
Bad Debts Recovered A/c Credit the increase in income

 

The closing journal entry for bad debts recovered would be as follows;

Bad Debts Recovered A/C  Debit
 To Profit and Loss A/C  Credit

(Transferring bad debts recovered to the income statement)

Related Topic – Journal Entry for Credit Sales and Cash Sales

 

Journal Entry for Bad Debts Recovered
Treatment of Bad Debts Recovered in the Accounting Books

 

Bad Debts Recovered Shown Inside a Financial Statement

Income statement showing bad debts recovered

Related Topic – What is Provision for Discount on Debtors?

Example – Journal Entry for Recovery of Bad Debts

Unreal corp was declared insolvent last year and an amount of 70,000 was 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.

Cash A/C 70,000
 To Bad Debts Recovered A/C 70,000

(Cash received from Unreal corp previously written off as bad debt)

 

Bad Debts Recovered A/C 70,000
 To Profit & Loss A/C 70,000

(Transferring bad debts recovered to the income statement)

 

>Read Grouping and Marshalling



 

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