Bad Debts

It will be easier if I break this down into three different sub-topics. It should be easier to understand if you work out the basic first.

Bad debt is an expense to the business, and is charged to the profit and loss account.

Whenever a debt becomes bad,
1) First, reduce the balance of the respective debtor by crediting it .
2) Open up a bad debt account and debit it.

Note: You will need to total up the bad debts account before posting it to the profit and loss account.

What will happen when bad debts are recovered?
It is possible for customers to repay back their bad debts, when these happen, we reverse back the steps shown above by:
1) Debit debtor account.
2) Credit bad debts account or credit bad debts recovered account (both of them have the same meaning). Choose either one, do not use both.

Important note: We have only reinstated the debtors back to their original in debt position, we have yet to recognise their payment.  To do this, we

1) Debit either cash / bank – depending on how debtors pay you.
2) Credit debtor’s account.

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