Journal entry of Bad debts and Bad debts recovers in Accounting

Journal entry of Bad debts and Bad debts recovers in Accounting

Bad debts and its journal entry

Bad debts

When we sold goods on credit and the receiver of goods in future disagree to pay the money of goods he purchases then the party whom we sell goods become bad debts in books of accounts 

Now we can understand it with examples

Suppose we sold goods worth Rs. 120,000 to Mahesh.

The journal entry of the same will be in the books of accounts will be

Mahesh Dr.

120,000

  To Sales A/c

     120,000

Being goods sold to Mahesh

 

 

Note : The goods are sold to Mahesh on credit.

Now after few days we approaches Mahesh and asked for cash .

Mahesh become insolvent and 40 paise in a rupee recover from his estate .

This means in 1 rupee there are 100 paisa if Mahesh paid us 40paisa therefore

 40/100 X 120,000 = 30,000 only and 90,000 becomes bad debts.

Bad debts are money unrecovered from Debtors who deny to pay money for any reason it can be he becomes insolvent or his tendency to not to  pay or any other reason .

Bad debts is loss in the books of accounts and nominal by nature therefore it is debited in the books of accounts as per rule of nominal accounts debit all expenses and losses .

The journal entry of the above entry will be:

Bad debts A/c     Dr

90,000

Cash A/c               Dr.

30,000

          To Mahesh

            120,000

(being cash received from Mahesh and bad debts written)

 

Bad is loss and shown in the Debit side of Profit and loss accounts therefore it reduces the profit of the firm.

Dr                                           Cr.

Particular

Amount

Particular

Amount

To bad debts

90,000

 

 

 

 

As bad debts are only loss therefore it can not be transfer to balance sheet.

Bad debts are given outside Trial Balance

Sometime bad debts are known after preparation of trail balance in accounting year under such condition bad debts need to be shown in Profit and Loss accounts and also deducted from the Debtors in the balance sheet in Asset side . Such bad debts are known as further bad debts.

 

Example Further bad debts in profit and loss accounts and balance sheet

Profit and loss A/c

Dr                                           Cr.

Particular

Amount

Particular

Amount

To further bad debts

XXXX

 

 

 

 

Balance sheet

 

Liabilities

Amount

Assets

Amount

 

 

Debtors xxxxx

Deduct further bad debts xxx

 

 

xxxxx

 

Here further bad debts are deducted from Debtors because we have not deducted it in Trial balance

Bad debts recover and its Journal Entry

Bad debts recover and its journal entry

 

When in one accounting year we declared that the money from the debtor is bad debts but in the next accounting year the money is recovered that money become bad debts recover.

Understand it with example

Year 1

Sold good to Rajeev Rs 15000.

Rajeev Dr

15,000

   To Sales A/c

       15,000

Being goods sold to Rajeev

 

Rajeev becomes insolvent and nothing recover from his estate

Bad debts A/c Dr

15,000

    To Rajeev

       15,000

Being bad debts written off

Year 2.

 

The money which was declared bad debts is recovered Rs 15,000

 

Cash A/c

15,000

    To Bad debts Recover A/c

       15,000

Being bad debts recover

 

It means the money which was declared bad debts last year is recovered and its an income from the firm and as per nominal accounts credit all income and gains we are debited Cash because the party account is already closed last year by written it as Bad debts and crediting it.

 Bad debts recover in Profit and loss accounts

 

Dr                                           Cr.

Particular

Amount

Particular

Amount

 

 

To bad debts recover A/c

15,000

 

It is shown in the credit side of Profit and loss accounts as it is income for the firm.

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