CBSE Class 11-commerce Answered

When goods are sold to a customer on credit and if the amount becomes irrecoverable because of her/his insolvency, the amount not recovered is referred to as bad debts. The bad debt account is opened to record the bad debts.

For example, customer who owed us Rs.10,000 is declared insolvent and 60 paise in a rupee is received from her/him on 15th April, 2015.

Analysis of transaction: It affects multiple accounts. When cash comes in, increases the debit balance of the asset.  A bad debt is an expense which increases the loss and debit the increase in expense. This is because unrealised amount is a loss to the business and the customer’s account is credited.