Adjustment of Bad Debts Recovered in Final Accounts (Financial Statements)

Bad debts recovered means the amount that has been received from debtors who were written off as bad earlier in the books of account. These were written as bad because there was no scope of recovery from them. It is treated as an income for the business and recorded in the credit side of Profit and Loss A/c.

Adjustment:

The following treatment takes place in respect of Bad Debts Recovered:

A. If Bad Debts Recovered is given outside the trial balance:

In such case, two effects would take place:

• First, it will be shown in the Cr. side of the Profit & Loss A/c.
• Second, the amount of cash would be increased by the amount of bad debts recovered in the Balance sheet.

B. If Bad Debts Recovered is given inside the trial balance:

In such a case, it will be shown only in the Cr. side of the Profit & Loss A/c.

Illustration:

The following adjustments were noted :

1. Further Bad Debts amounting to 2,000 and Provision to be created at 5% of debtors.

2. The value of Plant and Machinery is appreciated by 10%.

3. Depreciation on the building is charged at 12.5%.

Solution: