What is the accounting entry for bad debts and bad debt recovery?

The entry for bad debts will be:

Dr. Bad Debts Expense Account (to be netted off with revenue in the Income Statement)

Cr. Debtors Account (Receivables)

(this is equal to cancelling the invoice itself)

Suppose your customer is "ABC industries", you will credit the receivable account of ABC Industries with the amount which is now deemed non-recoverable. This is where you actually reduce the receivables of that particular customer directly when you know you wont get the money back at all.

You can also debit Revenue directly but this may impact your profitability ratios if automatically calculated by the accounting software you are using. So it depends whether you want to reduce revenue or show it in a separate line item to ease your financial analysis.

In case there is a situation where the decision has been pending for a long time and the auditors want you to reduce the receivables for presentation in the financial statements and you don't want to directly reduce the receivables hoping it will be recovered in the future (though it may take a little more time), you can credit a provisional account created for such entries instead of directly crediting the customer. The entry will be:

Dr. Bad Debts Expense Account

Cr. Provision for Bad Debts (Liability account)

This provisional account will then be shown in the BS netting off the actual receivables.

On recovery in the future, there will be two entries in each scenario:

In the first case:

Dr. Debtors Account

Cr. Revenue/Income Account

(this is to create the receivable which was earlier written off)

Dr. Cash/Bank Account

Cr. Debtors Account

(for payment received from that particular customer)

in the 2nd case:

Dr. Provision for Bad Debts (Liability account)

Cr. Revenue/Income Account

(this is to reverse the provision) - you can also credit a separate account such as "Misc. Income" to distinguish it from your current income since this income pertains to a past period.

Dr. Cash/Bank Account

Cr. Debtors Account

(for payment received from that particular customer)

There are other ways to handle the situation depending on what has been negotiated between you and the customer.

Hope this helps.

To record bad debts you we pass the following entry:

Dr. Bad debt expense

Cr. Trade receivables (debtors)

To record bad debt recovery, we pass following entry:

Dr. Bank/cash

Cr. Bad debt recovery (other income)