Question

Rs. 500 received from customer, whose account was written off as bad in previous year. was credited to his account.

Answer 1

Bad debts are debts owed to the business that have gone bad.

In other words, you don't think Joe Shmoe is going to pay you the $1,000 he owes you as he just declared bankruptcy or something like that.

What do you do? You record this unpaid debt as a loss, and we call this Bad Debts.

Here's the entry for recording this bad debt:

Dr Bad Debts $1,000

Cr Debtors Control $1,000

Note that the credit here is for the debtors account. What this means is that our debtors are less, which makes sense as we are not expecting as much money to be received anymore.

Now let's go over the journal entry for recording the recovery of bad debts.

Recovery of Bad DebtsLet's say that 2 years later Joe Shmoe's new business is doing well and he has money again and he is forced to pay you some of the money he owed you before (let's say $600). The money he pays you is now recorded as an income and we use the term Bad Debts Recovered.