Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Bad Debts Recovered

  • We have looked at the concept of Bad and Doubtful Debts
  • For a number of reasons a debt that was previously considered bad might become recoverable:
    • Maybe due to an agreement
    • A court settlement/order
    • The fortunes of the debtor improves
  • When this happens the debt must be reinstated into the books and the payment recorded as it should have been initially
  • The following entries are made:
    1. Reinstate the debt into the books:
      1. Dr Debtors personal Account in the debtor’s ledger/sales ledger
      2. Cr Bad Debts Recovered Account in the General Ledger
    2. When Payment is received record the payment using the following entries:
      1. Dr Cash/Bank in the Cash Book
      2. Cr Debtor’s Account in the debtor’s ledger/sales ledger
  • At the end of the period the business has two options:
    1. The business can either transfer the total balance from Bad Debts recovered account to the Income Statement(Profit and Loss Account) as other income
    2. Transfer the total figure from the Bad Debts Recovered Account to the Bad Debts Account
  • The effect is the same as the Bad Debts Account itself would be ultimately be transferred to the Profit and Loss Account (Income Statement) as an expense. Bad Debts Recovered is thus used to reduce the amount of bad debts incurred during period.
  • As an accounting student you should spare yourself the misery of the second method
  • Lots of confusion would arise from using it in certain scenarios
  • What if the business has had no bad debts during the period? This leaves the Bad Debts Account with a credit balance and result in the awkward effect of treating Bad Debts as Income.
  • The same would happen in the event of the bad debts figure for the period being less than the amount of bad debts recovered for the period:
    1. The preferred method of dealing with Bad Debts Recovered is to make the following entries at the end of the period:
      1. Dr Bad Debts Recovered Account in the General Ledger
      2. Cr Bad Profit and Loss Account (Income Statement as Income)
  • Again you are strongly encouraged to use this method instead