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

Bad debts recovered during the year, which had been written off in an earlier year, are treated in the final accounts as:

Bad debts recovered are treated as income and credited to the Profit and Loss Account, since the amount was charged as a loss in an earlier year and its recovery is a gain of the year in which it is received.

  1. AA deduction from current year's bad debts only
  2. BA credit to the Provision for Doubtful Debts account
  3. CIncome credited to the Profit and Loss AccountCorrect
  4. DAn addition to the proprietor's capital directly

Explanation

Recovery of an amount written off earlier is a gain of the current year. It is credited to Bad Debts Recovered and shown on the income side of the Profit and Loss Account. It is not adjusted against the provision or capital.

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