Bad debts recovered

Bad Debts should be written off at the end of financial year. Not through out the year

Dear Tarun

 

 

So does it mean that when we receive Rs. 20000 from X and he said thats all he can pay, we should pass entry for only Rs. 20000.

 

 

Bank 20000

 

 To X 20000

 

 

and at the end of financaila year when we finanalise books if we have not receive any payment from him then pass

 

 

Bad debts 10000

To X 10000

 

 

Is this the right way?

 

 

So bad debts occur when credit period is exceeded, debtor not respoinding to payment reminder and we are about to close our books?

 

 

Please do reply

The following treatment should be fine:

1-When sales is made:

Mr. X a/c dr. 30000

    To Sales a/c   30000

2-When Payment is received in full settlement:

Bank a/c dr.         20000

Bad debts a/c dr.  10000

     To Mr. X a/c         30000

3-When bad debts is recovered:

Mr. X a/c dr.        10000

      To Bad debts a/c   10000

(Reversal of the entry)

4-For payment received:

Bank A/c dr.        10000

       To Mr. X a/c        10000

If you observe now bad debts a/c and Mr. X a/c both stand closed. Well all of this could have been avoided had we used one control a/c like "Provision for Bad debts a/c". Also only at the year end we write off the bad debts by debiting the amount to P&L A/c.

I hope this helps.

Dear Nihar

 

I did some research on net and i find that bad debts should be booked as and when they happen and we shouldnt wait till end of year to book them.

 

 

If later we recover any of the bad debts recovered (even if in same FY) then we pass following entry

 

Bank

To  Bad Debts Recovered

 

 

In  your entry at the time when bad debts was recovered you debited X and credited Bad debts which i feel is not right.

 

Why again bring X into books when his account has already been closed.

 

I feel at the time of recover of bad debts, entry should be

 

Bank

To Bad debts recovered

 

regards

 

Well that is a way for accounting as well. Mostly we will have to look into Co. policy as well. 1-If the debtor says that 20000 is all he can pay, we close his a/c right away since we are sure no more realisation from him. 2-If Co. believes that even after final settlement it thinks that more money might be realised and you wait for year end to treat it as bad debt, then you can pass other set of entries as well. 3-for your entry bank to bad debt recovered, is a direct entry. If look into my last 2 entries in previous comment, then you will notice that the net entry is the same but only routed through Mr. X a/c.

We had alredy debited bad debt ac. Now rather giving again effect to X ac its appropriate to make only one entry. Bank ac .....Dr. 10000 To Bad debt ac. 10000 So now the baddebt ac stnds closed now.