Where Bad Debts Goes in Balance Sheet

 Recently Sumanth in our Ask your question whatsapp group, asked what is C

In a) Section, you have the responsibility to make the balance sheet from given information. b), c) and d) is Additional informations. 

for understanding of Sumanth, we focus on c) section.

In a ) section list, we have given Rs. 40,000 and c) section told us in this list there is Rs. 500 which we sold on credit to a debtor has insolvent. It means, Now, no chance to get same fund from same debtor. So, this is our bad debts. Bad debt is the loss of business. Every loss is the decrease of our capital. 

Now In the balance sheet it has two way effect as per Double entry system

No. 1 Effect with this our Capital will decrease with Rs. 500 in liability side

now, we do not directly decrease it in the balance sheet as minus in capital account.

We have given the profit of year 30,000, we will less this Rs. 500 loss from it

30000 - 500 = Rs. 25500

This will show in liability side or add same Rs. 25500 profit add in the balance sheet. It means automatically, our bad debt deduct from capital by doing this. 

No. 2 Effect : Now come to the Asset Side 

In balance sheet asset side, we will show the current asset of sundry debtors and deduct same bad debts

Rs. 40000 - 500 = Rs. 35500

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