Bad Debts Journal Entry: Format, Examples & Recovery

A bad debts journal entry records money that a business no longer expects to recover from a customer. When a credit-sale amount becomes irrecoverable, debit Bad Debts A/c and credit the customer’s account. This removes the uncollectible receivable and recognises the loss.

Table of Contents

• Bad debts journal entry format
• Bad debts journal entry with example
• Provision for doubtful debts entry
• Bad debts recovered journal entry
• Treatment in final accounts
• Income tax and GST considerations
• Common mistakes
• Frequently asked questions

What Is the Bad Debts Journal Entry?

Bad debts are customer dues that a business determines cannot be collected. The standard direct write-off entry is:

Narration: Being the amount due from the customer written off as irrecoverable.

Why? Bad debts are an expense (debit), while the customer receivable is an asset that must be reduced (credit). An overdue invoice alone does not automatically mean the debt should be written off.

Bad Debts Journal Entry With Example

Suppose a Jaipur stationery wholesaler sold goods on credit to a retailer for ₹18,000. After documented follow-ups, the retailer closes operations and the wholesaler determines the amount cannot be recovered.

The retailer’s outstanding balance falls by ₹18,000, and the business recognises a ₹18,000 loss. If only ₹6,000 of a ₹20,000 receivable is irrecoverable, write off ₹6,000, not the entire invoice; ₹14,000 remains receivable.

Entry to Transfer Bad Debts to Profit and Loss Account

This closing entry transfers the expense to the profit and loss account when using traditional ledger accounts. In accounting systems where expenses already flow into the income statement, a separate manual closing entry may not be necessary.

Provision for Doubtful Debts Journal Entry

A doubtful debt may still be recovered. Instead of removing a specific customer’s balance, a business may estimate expected non-collection and recognise a provision (also called an allowance for doubtful debts).

Example: Outstanding debtors are ₹1,00,000 and the estimated doubtful amount is 5%, or ₹5,000. The net receivable presented becomes ₹95,000, although individual customer balances remain unchanged.

Writing Off a Debt Against an Existing Provision

If ₹2,000 of that receivable later becomes irrecoverable and the provision covers the loss:

This reduces both the provision and the receivable without recognising the same expense twice. At year end, adjust the remaining provision to the newly required balance; do not automatically charge the full estimated balance again. The exact allowance methodology depends on the accounting framework used.

Bad Debts Recovered Journal Entry

Sometimes a customer pays after their debt has been written off. If the wholesaler later receives ₹3,000 on a previously written-off balance, the traditional entry is:

Recognise the recovery in the relevant income account. Under an allowance-based system, the business may first reinstate the receivable and then record its collection. The entry should follow the accounting policy consistently.

How Bad Debts Affect Final Accounts

For example, ₹80,000 of trade receivables less a ₹10,000 write-off and ₹3,500 remaining provision gives net receivables of ₹66,500, assuming the provision relates to the remaining balance.

Bad Debts: Income Tax and GST Considerations in India

Under the Indian income-tax rules applicable to ordinary business bad debts, an actual write-off in the accounts is generally required for a deduction under Section 36(1)(vii), subject to Section 36(2) and other applicable conditions. A mere provision for doubtful debts generally does not qualify for ordinary businesses. Recovery of a previously deducted bad debt can also have tax consequences. Refer to Income Tax Department guidance and confirm the treatment with your CA.

GST is separate: Writing off an unpaid customer invoice in the books does not, by itself, cancel the original GST liability or automatically permit reversal of output GST. A valid GST credit note or another statutory adjustment requires its own legal conditions; do not issue one merely because the customer has not paid.

Common Mistakes to Avoid

• Writing off every overdue invoice: Verify whether collection is genuinely unlikely before recognising an irrecoverable debt.
• Debiting the customer: The customer’s receivable must be credited when written off.
• Confusing provision and write-off: A provision estimates loss; a write-off removes a specific debt.
• Charging the same loss twice: Use the existing provision correctly when writing off a covered debt.
• Ignoring supporting records: Keep invoices, correspondence, follow-up history and write-off approvals for reconciliation and tax review.