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this controversy is never endingl it seems:
now, as i understand it, when the bad debt is recovered the entry is:
Dr cash
Cr bad debts——————————–
also, i read that if the recovery is in same year, you end up creating a receivable then record it as a payment.
——————————–question:
opening receivables: 10,000
Credit sales: 100,000
cash receipts: 90,000
discounts allowed: 800and
“Cash receipts include 1000 in respect of a receivable previously written off”
the way i answered this was by simply taking 89000 as cash rec instead of 90000 since the recovery has nothingto do with the receivable account.
but the text treats it as a Dr 1000 in the t account.
why has the text done this?
Dr: receivables 100,000
Cr: Sales: 100,000To reflect credit sales
Dr: Cash 90,000
Cr: Receivables 89,000
Cr: Bad debt recovered 1,000To account for cash received
If the discounts were allowed after invoicing (ie for early payment and not at the point of sale), then
Dr: receivables 100,800
Cr: sales 100,800Dr: discounts allowed 800
Cr: receivables 800What the text has probably done is the following:
Dr Cash 90,000
Cr Receivables 90,000and also
Dr Receivables 1,000
Cr Irrecoverable debts 1,000This results in the same net affect as what you wanted to do Mansoor, and either would be valid.
In practice it is very likely that what I have typed will be what has happened. This is because the bookkeeper will probably not know about the irrecoverable debt (or know, but not know what to do 🙂 ). They will likely therefore have put all 90,000 to receivables (because thats what they normally do) and then the accountant will correct it by moving 1,000 to irrecoverable debts.
Two little extra things:
1) We do not call them bad debts any more – it is irrecoverable debts
2) When we have irrecoverable debts recovered, we can either record them in a separate ‘irrecoverable debts recovered (which is what alchemist has done), or credit them simply to the irrecoverable debts expense account and treat them as a negative expense.
thank u John…. yes…. it does make sense about the bookkeeper not knowing about the irrrecoverable (whew..it takes too long too type this word..:) ) debt ….. it makes sense now….
and thank u alkemist!!
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