Problem: Debtor has carried a debt on Accounts Payable for several months while going through bankruptcy. The debt was recently discharged. The typical method to write off an AP entry is to
CR Accounts Payable
DR Other Income
In this case, however, such a procedure would misrepresent the debtor’s financial position by treating the discharged debt as income. The debtor has not received any money he has only been relieved of the debt.
Q: What account should be used to balance the discharged debt?
CR Accounts Payable
DR what?
Also, in the simplest sense, it seems to me that after the write off, Debtor’s Liabilities would be zero, and Capital/Retained Earnings should only reflect Debtor’s assets; all other things being unchanged. Is this correct?
CR Accounts Payable
DR Other Income
In this case, however, such a procedure would misrepresent the debtor’s financial position by treating the discharged debt as income. The debtor has not received any money he has only been relieved of the debt.
Q: What account should be used to balance the discharged debt?
CR Accounts Payable
DR what?
Also, in the simplest sense, it seems to me that after the write off, Debtor’s Liabilities would be zero, and Capital/Retained Earnings should only reflect Debtor’s assets; all other things being unchanged. Is this correct?
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