There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. In companiRead more
There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.
In companies, commencement is a declaration issued by the company’s directors with the registrar stating that the subscribers of the company have paid the amount agreed. In a sole proprietorship, the business can be commenced with the introduction of any asset such as cash, stock, furniture, etc.
Journal entry
In the journal entry, “Started business with Cash”
As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and as the rule says “debit what comes in, credit what goes out.” Whereas the capital a/c is credited because “debit all expenses and losses, credit all incomes and gains”
As per modern rules of accounting, cash a/c is debited as cash is a current asset, and assets are debited when they increase. Whereas, on the increment on liabilities, they are credited, therefore, capital a/c is credited.
Therefore, the entry we’ll be passing is-
See less
Debts are of two types one is Good Debt, and another one is Bad debt. Bad Debts The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization's customers due to the customer's inability to pay the amount of money taken on credit. Read more
Debts are of two types one is Good Debt, and another one is Bad debt.
Bad Debts
The amount which is not recoverable from the debtors is called Bad debt. It is an uncollectable amount from the organization’s customers due to the customer’s inability to pay the amount of money taken on credit.
Example 1
Mr A borrowed $100 from Mr B for his college fee and agrees to pay in 2 months. After the time period is complete Mr A failed to repay the borrowed amount. This is a Bad Debt for Mr B.
Example 2
XYZ Co. had made a credit sale of $50,000. A debtor who has to pay $1000 has been bankrupted. XYZ co. cannot recover the amount from the Debtor, so it records the irrecoverable amount as a bad debt.
Journal Entry
In this entry, “Bad debts are written off of Rs. 2000.”
Bad debt is the amount not recoverable from debtors, which is a loss for the organization.
Modern Rule
The Modern rules of accounting for Expenses are “Debit the increase in expenses and Credit the decrease in expenses.”
Golden Rule
The Golden rules of accounting for expenses and losses are “Debit all expenses and losses, Credit all incomes and gains.”
Bad Debts A/c Dr. 2,000
To Debtor’s A/c 2000
Bad debt is treated as a loss for the organization. As per the rule, this should be debited to the profit and loss account.
Profit and Loss A/c Dr. – 2000
To Bad Debts A/c – 2000
Instead of passing two separate entries for writing off, we can combine the entries and pass one entry.
Profit and Loss A/c Dr. 2000
To Debtor’s A/c 2000
Recovery of Bad debts
Recovery of Bad debt is the amount received for a debt that was written off in the past. It was considered uncollectable.
When we write off bad debt, it is recorded as a loss, but the recovery of bad debts is treated as an income for the business.
It is treated as an income and the recovery of bad debt is shown on the credit side of the Income statement.
Journal Entry for Recovery of Bad debts
Bank/Cash A/c Dr. – Amount
To Bad Debts Recovered A/c – Amount
Rules applied in the Journal entry are as per the Golden rules of accounting,
“Cash/Bank A/C” is a real account therefore debit what comes in and credit what goes out.
“Bad Debts Recovered A/C” is a nominal account therefore debit all expenses and losses, and credit all incomes and gains.
Treatment of “Bad Debt written off of Rs.2ooo.”
In Trial Balance: No effect
In Income Statement: It is shown on the debit side as Rs.2000 (loss)
In Balance Sheet: Rs.2000 shall be deducted from the sundry debtor account.