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Bad Debts Journal Entry: 5 Scenarios With Solved Examples

A bad debts journal entry has two sides. You debit Bad Debts and credit the customer’s account under Sundry Debtors. That removes the receivable from your books and moves the loss into your profit and loss account.

Those two lines cover the simplest case. The entry changes once you already carry a provision, or the customer pays part of the bill, or money turns up months after you gave up on it.

In the retail and distribution books we see, the entry itself is rarely what trips people up. Picking the right one of the five is.

Key Takeaways

  • The core entry is debit Bad Debts, credit Sundry Debtors
  • A provision estimates against the whole ledger; a write-off removes one named customer
  • GST already paid on a bad invoice does not come back
  • Income tax allows the deduction on a write-off, not a provision
  • Money recovered later is taxed in the year it arrives

What a Bad Debts Journal Entry Records

Two accounts move, and it helps to know why each one does.

Sundry Debtors is an asset. It says a customer owes you money and you expect to collect it. Once that stops being true, the asset is overstated and the balance sheet shows value that will never arrive.

Bad Debts is an expense. Debiting it drops the loss into the profit and loss account for the year you accept the money is gone. Crediting the debtor closes the customer’s balance. The two sides keep the books balanced while telling the truth about what you own.

The 5 Bad Debts Journal Entries at a Glance

Each scenario below has its own entry. This table is the short version to keep beside you.

ScenarioAccount DebitedAccount Credited
1. Writing off a bad debtBad Debts A/cSundry Debtors A/c
2. Creating a provision at year endProfit & Loss A/cProvision for Doubtful Debts A/c
3. Writing off against an existing provisionProvision for Doubtful Debts A/cSundry Debtors A/c
4. Recovering a debt written off earlierBank A/cBad Debts Recovered A/c
5. Part payment, balance written offBank A/c and Bad Debts A/cSundry Debtors A/c

The flow below shows how you land on the right one.

Which Bad Debts Entry Applies Customer will not pay in full Pays nothing, and no provision exists Pays nothing, but a provision exists Pays part of the bill and settles Dr Bad Debts Cr Sundry Debtors Dr Provision for Doubtful Debts Cr Sundry Debtors Dr Bank and Dr Bad Debts Cr Sundry Debtors Money arrives later? Dr Bank A recovery is always a fresh entry. You never reverse the original write-off.

Scenario 1: Writing Off a Bad Debt

Pass this entry on the date you accept the money will not arrive, not on the date the invoice fell due.

Take an auto-parts distributor in Ludhiana (an example) carrying ₹47,800 against a garage that shut down in March 2026. The garage is not trading and there is no forwarding address.

ParticularsDebit (₹)Credit (₹)
Bad Debts A/c47,800
To Sundry Debtors A/c (the garage)47,800

Bad Debts then closes into the profit and loss account at year end. The debtor’s ledger shows nil, so your accounts receivable total finally matches what you can realistically collect.

Scenario 2: Creating a Provision for Doubtful Debts

A provision is not a write-off. It is an estimate against the ledger as a whole, made because some slice of what you are owed usually goes bad, even though you cannot yet name which customer.

A textile wholesaler in Surat (an example) closes the year with ₹25,30,000 in debtors and, from experience, expects about 5% to sour. The provision is ₹1,26,500.

ParticularsDebit (₹)Credit (₹)
Profit & Loss A/c1,26,500
To Provision for Doubtful Debts A/c1,26,500

No customer ledger moves. The provision sits as a deduction from Sundry Debtors on the balance sheet, so the asset shows at the value you actually expect. Each following year you adjust the provision up or down rather than creating a fresh one.

Scenario 3: Writing Off Against a Provision and Topping It Up

Here is where the wholesaler above returns, six months on.

One buyer owing ₹38,200 has gone under, and the ₹1,26,500 provision is already sitting in the books. Because the loss was provided for last year, it does not hit the profit and loss account a second time.

ParticularsDebit (₹)Credit (₹)
Provision for Doubtful Debts A/c38,200
To Sundry Debtors A/c (the buyer)38,200

Some textbooks route this through Bad Debts A/c first, then close it against the provision. The net effect is identical. The mistake to avoid is charging the profit and loss account again, which counts one loss twice.

At the next year end you top the provision up rather than starting a fresh one. The wholesaler’s provision has ₹88,300 left after that ₹38,200 write-off. If debtors close at ₹21,40,000 and the same 5% still applies, ₹1,07,000 is needed, so only the ₹18,700 shortfall is charged.

ParticularsDebit (₹)Credit (₹)
Profit & Loss A/c18,700
To Provision for Doubtful Debts A/c18,700

If the provision left over is larger than you need, reverse the difference the other way: debit Provision for Doubtful Debts and credit the profit and loss account.

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Scenario 4: Recovering a Bad Debt You Wrote Off Earlier

Recovery is more common than most owners expect. A written-off customer restarts, or an insolvency settlement finally pays out.

The rule that matters: you do not reverse the original entry. The write-off was correct on the day you made it, so the recovery is recorded as fresh income.

A pharma distributor in Nashik (an example) receives ₹18,750 in August 2026 against a debt written off two years earlier.

ParticularsDebit (₹)Credit (₹)
Bank A/c18,750
To Bad Debts Recovered A/c18,750

Bad Debts Recovered is an income account and closes to the credit side of the profit and loss account. Do not touch the customer’s ledger, because that balance was cleared when you wrote it off.

Scenario 5: Part Payment With the Balance Written Off

Compare this with Scenario 1, where nothing came in at all. Here the customer settles for less than the full bill and you agree to close the account.

A pump supplier in Coimbatore (an example) is owed ₹94,000. After a year of chasing, the buyer offers ₹62,400 as a final settlement. The remaining ₹31,600 goes.

ParticularsDebit (₹)Credit (₹)
Bank A/c62,400
Bad Debts A/c31,600
To Sundry Debtors A/c (the buyer)94,000

Two debits, one credit, and the debtor closes at nil. Get the settlement in writing before you pass it, because an entry that reduces a customer’s balance needs something behind it if an auditor asks.

Why GST Gives No Relief on a Bad Debt

This is the point most accounting guides get wrong, usually by importing rules from countries that do offer relief.

In India, GST already paid on an invoice stays paid even if the customer never pays you. A supplier cannot reduce output tax liability just because a debt has gone bad. Section 34 of the CGST Act lets you issue a credit note on three grounds only: the taxable value or tax charged was too high, the goods came back, or the goods or services were deficient. Non-payment is not one of them.

So the write-off is a books-and-income-tax event, not a GST one. Your bad debt is the full invoice value including the tax you already remitted.

That makes the original invoice worth holding on to. Petpooja Invoice keeps the tax invoice, the customer ledger and any credit note records against one customer, which matters because a credit note raised for the wrong reason invites a query later.

When the Income Tax Act Allows a Bad Debts Deduction

Income tax treats the write-off and the provision very differently, and the gap costs businesses money every year.

Section 36(1)(vii) allows a deduction for a debt written off as irrecoverable in the books. Section 36(2) adds the main condition: the amount must already have been counted in your income, either in that year or an earlier one. That is why a bad debt on a sales invoice qualifies while a loan you gave a supplier usually does not.

In TRF Ltd v CIT, decided in 2010, the Supreme Court held that you need not prove the debt actually became irrecoverable. Writing it off in the books is enough. The CBDT accepted this in Circular No. 12/2016 and told its officers to stop litigating the point.

A provision gets no such treatment. Ordinary businesses cannot claim a deduction for a provision for doubtful debts, so the ₹1,26,500 in Scenario 2 is an accounting charge only, added back when computing taxable income. The separate provision-based deduction under Section 36(1)(viia) is limited to specified banks, co-operative banks and certain financial institutions.

Recovery is caught too. Under Section 41(4), an amount recovered against a debt you already claimed is taxed as business income in the year it comes in, even if that line of business has since closed.

Conclusion

Five entries cover almost everything a growing business will meet. A straight write-off debits Bad Debts against the customer, while a provision charges the profit and loss account instead. When a debt you already provided for finally fails, use the provision rather than charging the year twice. A recovery is fresh income, and a part payment splits across Bank and Bad Debts.

The harder discipline is spotting the debt early. A ledger reviewed once a year hands you write-offs; one reviewed monthly hands you a phone call while the customer can still pay. Ageing your outstanding invoices by bucket is the cheapest control you can put in place.

Petpooja Invoice keeps the customer ledger, the GST invoice trail and the ageing report in one place, so the debtor balance you write off is one you can defend with documents.

Frequently Asked Questions

1. Is a bad debt a direct or indirect expense?

It is an indirect expense and belongs in the profit and loss account, not the trading account. It is a loss on collection rather than a cost of buying or making what you sold. Our trading account guide shows which costs sit above that line.

2. How is bad debts shown in the balance sheet?

A bad debt written off does not appear on the balance sheet at all, because the debtor balance is already gone. A provision does appear, shown as a deduction from Sundry Debtors on the assets side, so the receivable is stated at the amount you expect to collect.

3. What is the difference between bad debts and doubtful debts?

A bad debt is a specific amount from a named customer that you have accepted is lost. A doubtful debt is an estimate that some part of the whole ledger will go the same way, without knowing whose. One closes a customer account, the other only creates a cushion.

4. Does writing off a bad debt affect my trial balance?

It stays balanced, since the entry has equal debit and credit sides. Bad Debts appears as a new debit and the debtor’s balance falls by the same amount. Our guide on what a trial balance catches covers the errors it will not reveal.

5. Can I claim a GST refund on a bad debt?

No. Indian GST has no bad-debt relief mechanism, so the tax you paid on that invoice is not recoverable through a refund or a credit note. Plan for the loss on the full invoice value, tax included. Our GST invoice templates show the formats a tax invoice and credit note must follow.

Avani Joshi
Avani Joshi
Avani Joshi is a Content Writer at Petpooja, where she writes about payroll, billing, and the everyday software that keeps Indian SMEs running. She has a knack for taking complicated topics and explaining them in plain language for business owners who don't have time to decode jargon.

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