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

Sharma Traders writes off a debt of Rs 4,000 owed by a customer who has become insolvent. Which journal entry is correct?

The correct entry debits Bad Debts Account and credits the customer's account for Rs 4,000. The bad debt is a loss to the business, so it is debited, while the debtor's balance is eliminated by a credit. No cash is involved in a write-off.

  1. ABad Debts A/c Dr 4,000 to Customer's A/c 4,000Correct
  2. BCustomer's A/c Dr 4,000 to Bad Debts A/c 4,000
  3. CBad Debts A/c Dr 4,000 to Cash A/c 4,000
  4. DProvision for Doubtful Debts A/c Dr 4,000 to Bad Debts A/c 4,000

Explanation

Writing off a bad debt is a loss. The loss account (Bad Debts) is debited and the personal account of the customer is credited to remove the receivable. Option B reverses the entry, and option C wrongly credits cash although no cash moves.

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