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

Sharma & Co. wrote off Rs 6,000 as bad debt from Ravi in 2023-24. In 2024-25, Ravi unexpectedly paid Rs 2,500 in cash in part settlement. How should this receipt be recorded in 2024-25?

Debit Cash Account and credit Bad Debts Recovered Account by Rs 2,500. Because the debt was written off earlier, the debtor's account is closed, so the receipt is treated as income in the year it is received, not as a settlement of the debtor.

  1. ADebit Cash A/c 2,500 and credit Ravi's A/c 2,500
  2. BDebit Cash A/c 2,500 and credit Bad Debts Recovered A/c 2,500Correct
  3. CDebit Cash A/c 2,500 and credit Bad Debts A/c 6,000
  4. DDebit Bad Debts Recovered A/c 2,500 and credit Cash A/c 2,500

Explanation

The debt was already written off, so Ravi's account has no balance. The amount received is a gain in the year of receipt, credited to Bad Debts Recovered A/c, with cash debited. Option A would create a credit balance in a closed account.

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