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

Mehta & Co. wrote off Rs 6,000 due from Ravi as bad debt in 2022-23. In 2023-24, Ravi unexpectedly paid Rs 2,500 in cash in full settlement of the amount. How should the receipt be recorded in 2023-24?

Cash is debited and Bad Debts Recovered Account is credited with Rs 2,500, the amount actually received. The debt was written off earlier, so the debtor's account is already closed, and the recovery is treated as income of the current year.

  1. ADebit Cash 2,500; credit Ravi's account 2,500
  2. BDebit Cash 2,500; credit Bad Debts Recovered account 2,500Correct
  3. CDebit Cash 6,000; credit Bad Debts Recovered account 6,000
  4. DDebit Bad Debts 2,500; credit Cash 2,500

Explanation

Since the debt was already written off, Ravi's account has no balance. The cash actually received, Rs 2,500, is a gain credited to Bad Debts Recovered. Option A would create a credit balance in a closed account, and option C records more than was received.

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