BAD DEBTS

Debts that irrevocable are called bad debts . A debts may become bad partially or fully . The debts that becomes irrecoverable is a loss and is transferred to the account titled' Bad Debts Account ' by passing the entry as follows : 

Bad Debts. A/c        ...  Dr.

  To Debtors ( by name ) A/c

( Being the amount due from a debtor becoming bad transferred to bad debts ) 

At the end of the year , amount of bad debts is transferred to the debit of Profit and Loss Account . It is so because it is a loss of the business . The entry passed is :

Profit and loss A/c   .. Dr.

  To Bad Debts A/c 

( Being the bad debts account transferred to profit and losss A/c )

Bad Debts appearing in the Trial Balance means entry for bad debts is already passed and further adjustment is not required . It also means that the amount of sundry Debtors appearing  in the Trial Balance is after deducting Bad Debts .

In case , an amount of Bad Debts are known as further Bad Debts . It means the amount of sundry Debtors in the Trial Balance is prior to the amount of Bad Debts given as adjustment . It means , an entry for these Bad Debts is yet to be passed in the books of account . Like all adjustments , these also need to be adjusted in the Final Accounts and the adjusting entry will be same as given above .

Accounting treatment of further Bad Debts in the Final Accounts is as follows :

1. It is shown as addition to the Bad Debts already written off on the debit side of Profit and Loss Account .

2. It is deducted from Sundry Debtors in the Balance Sheet .