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

Which statement about Bad Debts Recovered is correct under the usual accounting treatment?

Bad Debts Recovered is a revenue gain that is credited to the Profit and Loss Account in the year the money is received. The debtor's account was closed at write-off, so the recovery does not affect debtors, the provision or opening capital.

  1. AIt is shown as a deduction from debtors in the balance sheet
  2. BIt is a revenue gain credited to Profit and Loss Account in the year of recoveryCorrect
  3. CIt is credited to the Provision for Doubtful Debts account
  4. DIt is added back to the opening capital of the proprietor

Explanation

A recovery of a debt previously written off is a gain arising in the year of receipt. It is credited to Profit and Loss through Bad Debts Recovered. It does not touch debtors, as that account was already closed, nor the provision or capital directly.

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