To which account is the recovered bad debts account closed______________?
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Answer: D. Either B or C above
Explanation
Recovered bad debts represent unexpected cash inflows from accounts previously written off as uncollectible. Because this income does not belong to standard trading revenue, it is closed to the profit and loss account. Alternatively, some accounting frameworks credit it back to the provision for doubtful debts account. Bad debt recovery occurs when a customer unexpectedly pays an old, written-off debt. Accountants treat this as a gain or a reduction in past credit losses. The journal entry removes the balance from the recovery account by transferring it elsewhere.
Properly accounting for recovered debts ensures accurate reporting of non-operating income and provisions. It reflects prudent financial management and conservative asset valuation. This practice affects net income figures on the income statement. Debtor accounts are typically closed when debts are written off, not when recovered later. Options B and C are both accepted accounting treatments depending on company policy. Therefore, choosing either option makes D the complete and correct answer.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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