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.
Journal Entry for Recovery of Bad Debts
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.
What are further bad debts and its treatment
What are further bad debts ?
Further Bad debts are bad debts which are made after preparation of Trial balance .They are loss made because of irrevocable money from debtors.
Trial balance as on ………
Particular | Amount | Amount |
Debtors | 100000 |
|
Bad debts | 1000 |
|
Further bad debts Rs. 2000
Journal entry of further bad debts .
Particular | Amount |
Fur. Bad debts A/c | 2000 |
To Debtors | 2000 |
(being further bad debts) | |
Further bad debts in Profit and loss accounts
Particular | Amount | Particular | Amount |
To bad debts 1000 + further bad debts 2000 |
3000 |
|
|
Further bad debts are loss made by the company because of irrevocable money from debtors or accounts receivable therefore it is added to debit side of profit and loss accounts.
Further bad debts in balance sheet
Further bad debts are deducted from debtors in the assets side because they are known after preparation of balance sheet .
Liabilities | Amount | Assets | Assets |
|
| Debtors 100000 Less Further bad debts 1000 |
99,000 |
Difference between bad debts and bad debts recover
Bad debts | Bad debts recover |
Bad debts is loss made For debtors not paid. | Bad debts recover is income from debtors who was Bad debts earlier.
|
Bad debts journal entry | Bad debts recover journal entry |
Bad debts A/c Dr. To Debtors /Accounts receivable A/c (being bad debts ) | Cash A/c Dr. xxx To bad debts recover A/c xxx (being bad debts recover ) Note : it was earlier bad debts. |
They are shown in the debit side of Profit and loss accounts | They are shown in the credit side of Profit and loss accounts |
It reduces profit. | It increases profit. |
Provision for bad debts is made | No provision for bad debts recover is made. |
