Occasionally, a business may find that an amount it had previously written off as bad debt is received at a later date. The receipt of such an amount is called the recovery of bad debts.
Clearly, the amount cannot be credited to the personal account of the debtor because that account was closed down when the amount due from that debtor was written off as bad debt.
The entry to record bad debt recovery would, therefore, be as follows:
- Dr: Cash (or bank) A/c with the amount recovered
- Cr.: Bad debts recovery A/c with the same amount
After this entry, the bad debts recovery account will show a credit balance at the end of the financial year and will be transferred to the credit side of the profit and loss account as an item of income.
John has learned that David, who owed him $960, has passed away and left no estate behind. John decides to write off this amount as a bad debt.
Task 1: Show the journal entry.
Three months later, David’s family member visits John to pay off the amount due.
Task 2: Show the bad debts recovered journal entry.