Bad Debts Journal Entry-mahgyn

Bad Debts Journal Entry-mahgyn

Bad Debts

Meaning of Bad Debts: The amount which is receivable from a person or a concern for the sale of goods or otherwise is called debt. The person or concern to whom the amounts are receivable is called a debtor.

Goods are sold on credit or in cash. Generally, maximum goods of a large–scale industry are sold on credit. The amount is receivable on the sale of goods from a customer. On receipt of cash or acceptance of Bill, the amount of debts is decreased according to their nature.

TYPES OF BAD DEBTS

Bad Debts: The debt which is difficult or impossible to collect is called Bad Debts. The debtors' account is to be debited on credit sale of goods. The amount, which is realised, is to be credited to the debtors' account. But fully amount of debtors is not realised, i.e. a position of the debtors remains unrealised. The portion of debtors is called bed debts and it is the loss of the concern. 

The following journal entry is to be made for bad debts written off

PARTICULAR	AMOUNT	AMOUNT
Bad Debts A/C……………………………… Dr.                           To Sundry Debtors (Being bad debts written off.)	XXX	XXX

The following journal entry is necessary for the transfer of bed debts to the profit & loss account

PARTICULAR	AMOUNT	AMOUNT
Profit & Loss A/C……………………………… Dr.          To Bad Debts (Being bad debts transferred.)	XXX	XXX

Doubtful Debts: A debtor or a part of debtors, whether it is responsible or not, cannot be ascertained on a particular date is called doubtful debts. It cannot have treated as a loss on that particular date; so it cannot be written off. But a provision for doubtful debts is to be charged against the profit & loss account.

Differences Between Bad Debts and Doubtful Debts

Bad Debts	Doubtful Debts
Bad debt is a certain loss, so provision is not necessary.	A doubtful debt is a probable loss so; a provision is necessary for the doubtful debt.
It is a loss of business.	It is a possible loss
It is directly charged to the profit and loss account.	It is not directly charged in the P/L account. But it is to the P/L account in form of provision for doubtful debts.
It is deducted from the balance of sundry debtors account.	It is not deducted from the balance of sundry debtors account. It is recorded under the provision for doubtful debts account.
After preparation of final accounts, there is no existence of bad debts in ledger balance.	After the preparation of final accounts, there is an existence of doubtful debts in form of provision for doubtful debts.

Good Debts: The debts, which are not to be bad, i.e. there is no possibility of bad debts on realisation or no doubt about realisation, are called good debts. These are the liquid assets. The creation of provision for doubtful debts on good debts is not necessary.

Provision for Doubtful Debts

Definition: A provision, which is made for doubtful debts, is called provision for doubtful debts. It is said a reserve for doubtful debts. But it is charged against profit, so it is to be called a provision for doubtful debts.

Provision for Doubtful Debts Journal Entry

PARTICULAR	AMOUNT	AMOUNT
Profit & Loss A/C………………………… Dr.          To Provision for Doubtful Debts A/C (Being Provision for doubtful debts raised.)	XXX	XXX

Differences Between Bad Debts and Provision for Doubtful Debts

Bad Debts	Provision for Doubtful Debts
The Bad Debts is a Loss.	The Provision for doubtful debts is the provision for future loss.
On the accounting period, the full amount of bad debts charge under the P/L account.	After adjustment of opening balance, the amount of provision for doubtful debtors are to be charged on the P/L account.
During the accounting year, the balance is to be closed.	Its balance is generally shown at the end of the accounting period.
Next year’s balance impact is influenced by the current year.	The financial result and position of the next accounting period are influenced by the provision for doubtful debts of the current accounting period.

Recovery of Bad Debts

Definition: The bad debts which were previously written off and transferred to the profit & loss account, but it is realised in another accounting period is called the recovery of bed debts. The balance is to be transferred to P/L account at the end of each accounting period as a loss. 

Journal Entry of Recovery of Bad Debts

PARTICULAR	AMOUNT	AMOUNT
1.  For receipt of cash for recovery of bad debts         Cash/ Bank A/C……………………………… Dr.             To Bad Debts Recovery A/C  (Being the amount recovered for the debtors previously written off as bad debts.)         2. For transfer of the balance of bed debts recovery   Bad Debts Recovery A/C………………………… Dr.         To Profit & Loss A/C (Being the balance of bad debts recovered is to be transferred)	XXX         XXX	XXX         XXX