What is Bad Debt | Example | Journal Entry

Every business has customers to whom goods are sold on credit known as Debtors. The total amount due to debtors can be categories into three main categories i.e. Good Debt, Doubtful Debt, and Bad Debt. Good Debt means the amount due to debtors which surely recoverable. Doubtful Debt means the amount due to debtors which not surely recoverable, it may be or may not be recovered. Bad debt is that amount that can not recoverable from Sundry Debtors after applying 100% effort.

What is Bad debt?

Bad Debt means the amount that is irrecoverable from the debtors (customers) because of any reason i.e. Debtors shut down their business, or become insolvent, etc. It is also called irrecoverable debts. it is treated as the loss of the business and transfer from assets account to loss a/c or from balance sheet to profit and loss statement. It is unfortunate expenses that can be or can not be incurred. In the case where a business allows extended credit to their customer, there is always a risk for bad debts. So that's why all business calculates the amount of bad debt for the current financial year on the expectation method. The fixed percentage of credit sales are transferred to the bad debt allowance for the unfortunate default incurred by the customer.

The Journal entry for Bad debt

with Golden rules:

We will Explain the Journal entry for Bad debt with the golden rule of accounting as follows: -

Example 1:

01/08/2017 Rs 50,000/- receivable from Mr Ram But he becomes insolvent did not recover anything from his estate. Explanation of the applicability of the rule in the below table:

Name of Account	Type of Account	The rule will be Applied	Effect of a transaction on accounts	Condition of Rule applied	According to Rule, It will be Dr./Cr.
B/Debts	Loss	Nominal Rule	The whole payment become bad	All expenses and losses	Debit
Mr Ram	Person	Personal Rule	Treated as Bad Debt. So nothing recovered. giving loss to business	Giver	Credit

The journal entry for the transaction is the following:

Date	Particulars	L.F.	Debit	Credit
01-01-2017	Bad Debts A/c                            Dr.		50,000
	To Mr Ram a/c			50,000
	(Being nothing received from his estate)

Also, check out the image of the journal entry as follows:

Example 2:

01/08/2017 Rs 50,000/- receivable from Mr Ram but he becomes insolvent and only 60% of the total amount due recovered from his side. cash received =50,000*60% = 30,000/- amount of B/D=50,000-30,000 = 20,000/- Explanation of the applicability of the rule in the below table:

Name of Account	Type of Account	The rule will be Applied	Effect of a transaction on accounts	Condition of Rule applied	According to Rule, It will be Dr./Cr.
Cash A/c	Asset	Real Rule	Received cash	Comes in	Debit
B/Debts	Loss	Nominal Rule	Short payment received	All expenses and losses	Debit
Mr Ram	Person	Personal Rule	Paying Cash	Giver	Credit

The journal entry for the transaction is the following:

Date	Particulars	L.F.	Debit	Credit
01-08-2017	Cash a/c                                      Dr.		30,000
	Bad Debts A/c                            Dr.		20,000
	To Mr Ram a/c			50,000
	(Being final settlement received from Mr Ram)

Also, check out the image of the journal entry as follows:

Journal entry for Bad debts with modern rules:

We will Explain the Journal entry for Bad debt with modern rules of accounting shown as following: -

Example 1:

01/08/2018 Rs 50,000/-receivable from Mr Ram but he becomes insolvent did not recover anything from his estate. Explanation of the applicability of the rule in the below table:

Name of Account	Type of Account	The rule will be Applied	Effect of a transaction on accounts	Condition of Rule applied	According to Rule, It will be Dr./Cr.
B/Debts	Loss	Expense Rule	losses incurred	Increase in Expenses	Debit
Mr Ram	Debtors (Asset)	Assets Rule	Treated as Bad Debt. So nothing recovered	Decrease in assets	Credit

The journal entry for the transaction is the following:

Date	Particulars	L.F.	Debit	Credit
01-08-2017	Bad Debts A/c                            Dr.		50,000
	To Mr Ram a/c			50,000
	(Being nothing received from his estate)

Also, check out the image of the journal entry as follows:

Example 2:

01/08/2018 Rs 50,000/- receivable from Mr Ram but he becomes insolvent and only 60% of the total amount due recovered from his side. cash received =50,000*60% = 30,000/- amount of B/D =50,000-30,000 = 20,000/- Explanation of the applicability of the rule in the below table:

Name of Account	Type of Account	The rule will be Applied	Effect of a transaction on accounts	Condition of Rule applied	According to Rule, It will be Dr./Cr.
Cash A/c	Asset	Assets Rule	Received cash	Increase in assets	Debit
B/Debts	Loss	Expense Rule	losses incurred	Increase in Expenses	Debit
Mr Ram	Debtors (Asset)	Assets Rule	Treated as Bad Debt. So nothing recovered	Decrease in assets	Credit

The journal entry for the transaction is the following:

Date	Particulars	L.F.	Debit	Credit
01-08-2017	Cash a/c                                      Dr.		30,000
	Bad Debts A/c                            Dr.		20,000
	To Mr Ram a/c			50,000
	(Being final settlement received from Mr Ram)

Also, check out the image of the journal entry as follows:

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