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Bad debts recovered

Shivani (Learner) (1881 Points)

17 April 2015

Dear Members

Goods sold to X for Rs. 30000 in FY 14-15.

X makes payment of Rs. 20000 in final settlement of his account resulting in bad debts of Rs. 10000.

These bad debts were written off in FY 14-15.

But now before the completion of FY 14-15, X comes to us and pays Rs. 10000 which earlier he said he could pay and which we booked as bad debts.

Now my question is what entry to pass when he repays his Rs. 10000 which we passed as bad debts.

I DONT feel following entry would be right.

Bank 10000

To Bad debts recovered 10000

Reason i feel it wont be right is because we are still in the same financial year.

Should we wait for year to finish before we book bad debts into our books.

I mean even if X said he couldnt pay, we wait for end of year to book bad debts in our books.

Regards

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6 Replies

tarun mongia (C.A) (26 Points)
Replied 17 April 2015

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

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Shivani (Learner) (1881 Points)
Replied 17 April 2015

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

Nihar Ranjan Rout (CA Final & CS Final) (577 Points)
Replied 17 April 2015

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.

Shivani (Learner) (1881 Points)
Replied 18 April 2015

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

Nihar Ranjan Rout (CA Final & CS Final) (577 Points)
Replied 18 April 2015

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.

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vaibhav (student) (221 Points)
Replied 19 April 2015

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.