Explain bad debts in brief. Give an example.

Asked by Topperlearning User | 14th Jun, 2016, 05:30: PM

Expert Answer:

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.

Date

Particulars

L.F.

Debit

Rs. 

Credit

Rs. 

2015

April 15

Cash A/c  Dr.

Bad debts A/c  Dr.

 To Personal A/c

 (Being 60 paise in a rupee received on her/his insolvency)

 

6,000

4,000

 

 

10,000

 

Answered by  | 14th Jun, 2016, 07:30: PM