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

Where should 'Bad Debts Recovered' (a debt written off in an earlier year and now received) be shown in the final accounts of a sole proprietor?

Bad debts recovered are shown as an income on the credit side of the Profit and Loss Account, because the debt was written off earlier and its receipt now is a gain of the current year.

  1. ACredited to the Profit and Loss Account as incomeCorrect
  2. BDeducted from the Sundry Debtors in the Balance Sheet
  3. CAdded to the Provision for Doubtful Debts
  4. DDebited to the Profit and Loss Account as an expense

Explanation

A debt recovered after being written off in an earlier year is a gain of the current year. It is credited to Bad Debts Recovered account and transferred to the credit side of Profit and Loss Account. Debiting it or adjusting debtors would be incorrect since the debtor was already removed from the books.

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