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Bad Debts

Sometimes, some people fail to pay their dues either partially or completely. The amount that is irrecoverable is a loss and known as 'Bad Debt'. The following entry is passed when a debit becomes bad:
Bad Debts A/c Dr.
To Debtor's (by name) A/c
As an effect of this entry, the debtor's account is closed and a new account called bad debts account is opened which is transferred, at the end of the year, to the Profit and Loss Account (debit side). The entry is:
Profit and Loss A/c Dr.
To Bad Debts
As already discussed, items appearing in the Trial Balance are transferred to Trading Account or Profit and Loss Account or the Balance Sheet. For example, bad debts appearing in the Trial Balance will be transferred to the Profit and Loss Account. In other words, we can say that adjustment is not required for bad debts already appearing in the trial Balance. It also means that the amount of sundry debtors appearing in the Trial Balance is after deducting Bad Debts.
If the amount of bad debts is given outside the Trial Balance, ie., by way of adjustment, such bad debts are known as further bad debts. It means the amount of sundry debtors in the Trial Balance is prior to the amount of bad debts and given as adjustment. In such a situation, bad debts are considered as any other adjustment, which means that entries for such bad debts have not been passed in the books of account. Like all adjustments, these also need to be adjusted in the Final Accounts and the adjusting entry will be same as given above:
The treatment of such bad debts in the Final Account is as follows:
Example 6- The following is the extract from a Trial Balance


Debit Rs.

Credit Rs.

Sundry Debtors



Bad Debts


Additional Information - Write off Rs. 1,000 as bad debts.

Show relevant extracts from the Profit and loss Account and the Balance Sheet.


Profit and Loss Account

Dr.     Cr.





To Bad Debts          2,000

Add:New Bad Debts 1,000











Balance Sheet






Sundry Debtors          1,00,000

Less: New Bad debts       1,000






It sometimes happens that the amount of bad debts earlier written off is later recovered wholly or partially. In that case the amount is not credited to the debtor's personal account, but to the Bad Debts Recovered Account. It is considered a 'Profit'. The entries are:
  1. Cash or Bank A/c Dr.
    To Bad Debts Recovered A/c
    (Being bad debts recovered)
  2. Bad Debts Recovered A/c Dr.
    To Profit and Loss A/c
    (Being Bad Debts recovered transferred to Profit and Loss Account)

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