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Fundamentals of Financial and Cost Accounting · Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Bad Debts and Bad Debts Recovered: Journal Entries

Updated 10 October 2026 · Fact-checked

A **bad debt** is an amount owed by a debtor that you cannot collect. You write it off by debiting Bad Debts A/c and crediting the Debtor's account. If cash comes in later from a debt already written off, it is **bad debts recovered**: debit Cash/Bank, credit Bad Debts Recovered A/c, which is a gain.

Understand Bad Debts and Bad Debts Recovered

When you sell goods on credit, the customer becomes a debtor and you record the amount as an asset. Sometimes the customer cannot pay, for example due to insolvency, death, disappearance or a business failure. That amount is a bad debt. It is no longer an asset, so it must be removed from the books.

Bad debts are a loss to the business. They are an expense of carrying on credit sales. So you debit Bad Debts A/c (a nominal account) and credit the debtor's personal account. At the year end, Bad Debts A/c is transferred to the debit side of the Profit and Loss Account.

Sometimes a debtor pays after you have written off the debt. This is bad debts recovered. The write-off was a loss in an earlier entry. The recovery is a gain. You debit Cash or Bank and credit Bad Debts Recovered A/c. This is an income and goes to the credit side of the Profit and Loss Account.

If the debt was written off in an earlier year, the recovery is still income of the year in which you receive it. You do not reopen the old year. Some books first reinstate the debtor, but the simple method above is what exam questions expect.

A partial bad debt happens when the debtor pays part, for example 50 paise in the rupee, and the rest is lost. Only the unpaid part is a bad debt. The amount received is debited to Cash or Bank.

Key formulas to remember

Writing off a bad debt
Bad Debts A/c Dr. | To Debtor's A/c
Debit the loss, credit the debtor. Use the amount that cannot be collected.
Recovery of a debt written off
Cash/Bank A/c Dr. | To Bad Debts Recovered A/c
Credit is an income. Do not credit the debtor's account if the debt was already written off.
Partial payment from insolvent debtor
Bank A/c Dr. (amount received) | Bad Debts A/c Dr. (balance) | To Debtor's A/c (total due)
Bad debt = Amount due − Amount received.
Transfer at year end
Profit and Loss A/c Dr. | To Bad Debts A/c ; Bad Debts Recovered A/c Dr. | To Profit and Loss A/c
Bad debts is a loss. Bad debts recovered is a gain.
Debtors on Balance Sheet
Closing Debtors = Opening Debtors + Credit Sales − Cash received − Returns − Bad debts
Bad debts reduce debtors. Bad debts recovered does not affect the debtors balance.

How to solve Bad Debts and Bad Debts Recovered questions

Use this method for any question on bad debts and recoveries.

  1. 1Read whether the debt is written off now, was written off earlier, or is partly received.
  2. 2Check the date. Is it a current year write-off or a recovery of an earlier year's write-off?
  3. 3For a write-off, debit Bad Debts A/c and credit the debtor for the uncollectable amount only.
  4. 4For a partial receipt, debit Cash or Bank with the amount received and debit Bad Debts with the balance.
  5. 5For a recovery of an amount already written off, debit Cash or Bank and credit Bad Debts Recovered A/c.
  6. 6Transfer Bad Debts to the debit side of the P&L Account and Bad Debts Recovered to the credit side.
  7. 7If the question asks for closing debtors, deduct bad debts from the debtors balance.

Quickest way: Loss out, gain in

When to use it: Use it for MCQs asking for the journal entry, the account debited or credited, or the effect on profit.

  1. Ask: is money lost or received? Lost means debit Bad Debts. Received after write-off means credit Bad Debts Recovered.
  2. Bad Debts is always a debit and reduces profit. Bad Debts Recovered is always a credit and increases profit.
  3. For a partial payment, split the amount due into received and lost.
  4. Compare the options and eliminate any that credit Bad Debts A/c for a write-off or debit the debtor for a recovery.

Common mistakes in Bad Debts and Bad Debts Recovered

  • Crediting the debtor's account when a written-off debt is recovered.

    Students think a receipt from a debtor always goes to the debtor's account.

    Fix: If the debt was already written off, the debtor's account is closed. Credit Bad Debts Recovered A/c.

  • Treating Bad Debts Recovered as a reduction of debtors.

    Students link the word debt with the debtors balance.

    Fix: The debtor was already removed at write-off. The recovery is a separate income.

  • Writing off the full amount when the debtor pays part.

    Students ignore the amount actually received.

    Fix: Debit Bank with the amount received and Bad Debts with only the unpaid balance.

  • Putting Bad Debts on the credit side of the P&L Account.

    Confusion between the loss and the recovery.

    Fix: Bad Debts is a loss, so it goes to the debit side. Recovery goes to the credit side.

  • Treating a recovery from an earlier year as an adjustment to that year's profit.

    Students want to reopen the year of the write-off.

    Fix: Record it as income in the year of receipt.

Worked examples

Example 1

Ramesh owes ₹20,000 to Sharma Traders. Ramesh is declared insolvent and pays ₹0.60 in the rupee. Pass the journal entries and find the bad debt.

Show the solution
  1. Amount due = ₹20,000.
  2. Amount received = 20,000 × 0.60 = ₹12,000.
  3. Bad debt = 20,000 − 12,000 = ₹8,000.
  4. Entry: Bank A/c Dr. ₹12,000; Bad Debts A/c Dr. ₹8,000; To Ramesh A/c ₹20,000.

Answer: Bad debt is ₹8,000. Bank is debited ₹12,000, Bad Debts is debited ₹8,000 and Ramesh is credited ₹20,000.

Example 2

A business wrote off ₹5,000 owed by Mohan as a bad debt in 2025-26. In 2026-27, Mohan pays ₹3,000 in full settlement of that old debt. Which entry is correct, and what is its effect on 2026-27 profit?

Show the solution
  1. The debt was already written off, so Mohan's account is closed.
  2. Cash received = ₹3,000.
  3. Entry: Bank A/c Dr. ₹3,000; To Bad Debts Recovered A/c ₹3,000.
  4. Bad Debts Recovered is income, so it is credited in the P&L Account of 2026-27.
  5. Profit of 2026-27 increases by ₹3,000.

Answer: Debit Bank ₹3,000 and credit Bad Debts Recovered ₹3,000. Profit of 2026-27 rises by ₹3,000.

Exam tips

  • Look for the words 'previously written off' or 'recovered'. They signal a credit to Bad Debts Recovered.
  • In partial payment questions, calculate the bad debt from the rupee rate first, then pick the option.
  • Remember that Bad Debts Recovered does not change the closing debtors figure.
  • Check carefully whether the question asks for the amount of bad debt or the amount received. They are different numbers.

Practice questions from Accounting Treatment of Bad Debts and Provision for Doubtful Debts

Bad Debts and Bad Debts Recovered in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bad Debts and Bad Debts Recovered: frequently asked questions

What is a bad debt?

A bad debt is an amount owed by a debtor that you cannot collect. It is a loss to the business. You write it off by debiting Bad Debts A/c and crediting the debtor.

What is the journal entry for bad debts recovered?

Debit Cash or Bank A/c and credit Bad Debts Recovered A/c. This applies when the debt was written off earlier. The credit is an income.

What is the difference between bad debts and bad debts recovered?

Bad debts is a loss and is debited in the P&L Account. Bad debts recovered is a gain and is credited in the P&L Account. One removes a debtor, the other records cash received after removal.

Where do bad debts appear in final accounts?

Bad debts appear on the debit side of the Profit and Loss Account. Bad debts recovered appears on the credit side. The debtors figure on the Balance Sheet is shown after deducting bad debts.