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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 owed by Ravi as bad in 2023-24. In 2024-25 Ravi unexpectedly paid Rs 2,500 in cash. What is the correct treatment in 2024-25?

Cash is debited and Bad Debts Recovered Account is credited with Rs 2,500. Since the debt was written off in an earlier year, the later receipt is treated as income of the current year, not as a settlement of the debtor's account or as a sale.

  1. ADebit Cash A/c and credit Ravi's A/c Rs 2,500, leaving a credit balance
  2. BDebit Cash A/c Rs 2,500 and credit Bad Debts Recovered A/c Rs 2,500Correct
  3. CDebit Bad Debts A/c and credit Cash A/c Rs 2,500
  4. DDebit Cash A/c Rs 2,500 and credit Sales A/c Rs 2,500

Explanation

The debt was already written off in an earlier year, so the amount received later is a gain. Cash is debited and Bad Debts Recovered (income) is credited by Rs 2,500. Crediting Ravi's account would wrongly revive a closed account.

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