Recovery of Bad Debts and their Journal Entries

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Recovery of Bad Debts – Concept, Accounting Journal Entries and Solved Example:

Some times business receives a pleasant surprise, when it recovers the bad debts which were previously written off as bad debts. This is recorded as bad debt recovery. However, if the amount recovered is less than the original bad debt amount, the receivable account should not be re-instated for the remaining balance.

Journal Entry 1 (a):  

Recording receipt of cash from a trade receivable whose account was previously written off as bad:

Debit (Dr) Cash

Credit (Cr) Trade receivables

Journal Entry 1 (b):

Cancelling the entry previously made to write off a trade receivable’s account as bad:

Debit (Dr) Trade receivables

Credit (Cr) Bad debts recovery

Journal Entry 2:

On recovery of bad debts, there is a little point in reviewing the “dead” or “written off” account of trade receivable. Normally no entry is passed in the written off trade receivable’s account. So instead of passing two separate entries, one single entry is passed to record bad debts recovery:

Debit (Dr) Cash

Credit (Cr) Bad debts recovery

Solved Example:

The accountant of Mitchel and Michael Ltd. has prepared the following aged trade receivables schedule or (aging schedule of trade receivables) as at 31 Dec. 2018. The policy applied by Mitchel and Micheal for the provision for doubtful debts is on a sliding scale basis and is given as follows:

bad recovery 1

On 1 January 2018, the provision for doubtful debts account had a balance of $500. On 17 July, Harrison Jim, whose debt of $600 had been written off completely in 2017 returned and paid his debt in full.

On 2 Dec. 2018, Bay Ltd. a trade receivable, ceased trading and Mitchel and Michael received payment of $0.60 in the $1 in final settlement of his debt of $500. The remainder of the debt was written off in full at that date.

John Kelly, a trade receivable of $320, has recently been declared bankrupt. This amount had been included in the aged trade receivables schedule above as being outstanding over 100 days. It is to be written off in full immediately from the aged trade receivables’ schedule.

$460 are other total bad debts written off during the year.

Required:

Prepare the following ledger accounts for the year ended 31 Dec. 2018:

(a) Bad debts (b) Provision for doubtful debts (c) Bad debts recovery account

Solution:

(a) Bad Debts Account

bad recovery 2

(b) Provisions for Doubtful Debts Account

bad recovery 3

Working: Provision required on 31 Dec. 2018 = [(19600 x 1%) + (8400 x 2%) + (3650 x 4%) + {(1320 – 320) x 10%}] = $610

(c) Bad Debts Recovery Account

bad recovery 4