What is Bad Debt | Example | Journal Entry

Bad debts feature image

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:

Bad debts journal entry  - What is Bad Debt | Example | Journal Entry

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:Bad debts journal entry2  - What is Bad Debt | Example | Journal Entry

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:
Bad debts journal entry  - What is Bad Debt | Example | Journal Entry

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:

Bad debts journal entry2  - What is Bad Debt | Example | Journal Entry

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