Which of the following is the correct entry when a debt previously written off as irrecoverable is unexpectedly paid in full by the customer?
Answer and explanation
Correct answer: B. Debit bank, credit irrecoverable debts recovered
- Step 1: The debt was already removed from receivables and charged as an expense.
- Step 2: On recovery, cash comes in: debit bank.
- Step 3: The credit reverses the earlier expense, in an irrecoverable debts recovered account.
Answer
Debit bank, credit irrecoverable debts recovered.
Why not the others: Debit bank, credit trade receivables: The debt was already removed from trade receivables, so crediting receivables would leave a credit balance on the customer's account. This is a payment out of bank and would increase the expense. The allowance is an estimate for future losses, and the cash received is not paid out of the bank.
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