The following accounting entries are made when bad debt is recovered?

A. debit bad debts accounts and credit bad debt recovered account
B. debit debtors accounts and recovered account
C. debit bad debts recovered account and credit bad debts account
D. debit bad debts account and credit profit and loss account

Correct Answer:

Option D – debit bad debts account and credit profit and loss account

Explanation

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