Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid. An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be furtRead more
Accrual
Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid.
An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts
Accrual Expense-
Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.
For example- If rent of 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March
For example- Interest of 1,000 for the month of March of the loan amount of 10,000 paid in April then will be accounted for in the books in March
These are the following accrued expense
- Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
- Accrual Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
- Accrual Expense- Acrrual expense means the amount for any expense paid on a later period than the period when it pertains to be paid
- Accrual Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due
- Accrual Loan Interest– Loan Interest means the amount of interest on a loan which is paid on a later period than the period when it is due on
Accrual Revenue-
Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received in the later period.
For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue
For example- Rent of 10,000 for the month of March received in April month then this rent will be accounted for in the books in March
- Accrual Income- Acrrual expense means the amount for any income received on a later period than the period when it pertains to be received
- Accrual Rent– Accrual rent means the amount for using the land of the entity by the other party is received at a later period than the period when it is put into use.
- Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive
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.
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