What are Bad debt recovered | Example | Journal Entry

Bad debts recovered feature image

We already cover the meaning and journal entries related to the bad debt in the previous article. In this article we will discuss about that amount which is already written as bad debt in the books now got recovered. This recovered amount is known as bad debt recovered. 

What are bad debt recovered?

The Bad debt recovered is the amount which was written as bad debts earlier but now received in a current financial year. It is treated as income/gain of business for current year because in a related previous financial year it was written as bad debt and treated as loss/expanse. The total amount of bad debt also claimed as a loss in the books. 

For Example: –

Ram is our customer, He bought goods from us worth Rs 1,00,000. After 6 months approximately, he made a payment to us of Rs 75,000. After some time, his business occurring losses and he shut down his business. On the closing of his business, our sale team approve us that now we can’t recover the balance amount from his estate because he is not traceable right now. 

So, on the approval of the sales department, our accounting department treated this amount Rs 25,000/-  as bad debts in the books of account.

At the end of the Financial year, The total amount of bad debt had approved by the Chartered Accountant and we will be claimed it as loss/expense

But in the next financial year, Ram comes back and started his business again and he approaches us to supplied goods to him again. Our sales team clear him that the goods will be supplied only after when he will pay his last year total outstanding amount. 

He is agreed with our sales team and paid the last year outstanding amount of Rs 25,000 to us, which is written as bad debts in the last financial year.

Because his outstanding amount is treated as bad debts earlier and claimed as loss in the books of the last financial year. 

Now, we have to treat this recovered amount as income in this financial year. So, that’s why we create a new income account of Bad debt Recovered account. 

Journal entry for the bad debt recovered with the golden rule:

Example:

01/01/2018 received Rs 5,000/- written as bad in 2016/17.

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 recovered Gain Nominal Rule The earlier bad debt now recovered  All income and gains Credit

The journal entry for the transaction is the following:

Date  Particulars  L.F. Debit  Credit  
01-01-2017 Cash A/c                            Dr.   5,000  
  To Bad Debt Recovered a/c     5,000
  (Being amount recovered which is written off as bad debt in earlier year.)      

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

Bad debts recovered journal entry  - What are Bad debt  recovered | Example | Journal Entry
B/debts recovered journal entry

Journal entry for the bad debt recovder with the modern rule:

Example:

01/01/2018 received Rs 5,000/- written as bad in 2016/17. 

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 recovered Gain Incomes Rule Gained earned  Increase in Income Credit

The journal entry for the transaction is the following:

Date  Particulars  L.F. Debit  Credit  
01-08-2017 Cash A/c                            Dr.   5,000  
  To Bad Debt Recovered a/c     5,000
  (Being amount recovered which is written off as bad debt in earlier year.)      

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

The journal entry for the transaction is the following:

Bad debts recovered journal entry  - What are Bad debt  recovered | Example | Journal Entry

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T.S. Grewals Double Entry Book Keeping - What are Bad debt  recovered | Example | Journal Entry

T.S. Grewal’s Double Entry Book Keeping

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