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a) At the time of Receipt
Cash/Bank Dr xxxxx
To Debtor a/c xxxxx
b) Transfer entry to statement of p&l (assume bad debt charged in previous years)
Debtor Dr xxxxx
To bad Debt Recovered xxxxx
CASH (DR)
Income (P& loss) (CR)
debt : receivable
credit : bad debt expenses
--------------------------------------
paying
debt : cash
credit : receivable
Occasionally, a bad debt previously written off may subsequently settle its debt in full or in part. In such case, it will be necessary to cancel the effect of bad debt expense previously recognized up to the amount settlement.
Example
ABC LTD sells goods to DEF LTD for $500 on credit. ABC LTD subsequently finds out that DEF LTD is being liquidated and therefore the prospects of recovering its dues are very low. ABC LTD therefore writes off the receivable from its books. However, the administrator appointed to oversee the liquidation of DEF LTD instructs the company to pay $300 to ABC LTD in full settlement of its dues.
As $300 of the bad debt has been recovered, it is necessary to cancel the effect of previously recognized bad debt expense up to this amount. The accounting entry will therefore be as follows:
$ $ Debit Cash 300 Credit Bad Debt Recovered (Income) 300
