Final answer:
Debts recovered after being written off should be credited to a 'Bad Debts Recovered' account, which reflects the recovery of income previously not anticipated.
Step-by-step explanation:
When debts that have been previously written off as bad are subsequently recovered, the correct accounting treatment is to credit the amount recovered to an account specifically for such recoveries, often referred to as 'Bad Debts Recovered' account.
This account is then included in the company's income statement, showing that a recovery of income has occurred, which was not anticipated when the debt was originally written off. The entry will show as a credit to the 'Bad Debts Recovered' account and a corresponding debit to the 'Cash' account to reflect the increase in cash. This is because the recovery represents an inflow of economic benefits that increase the entity's assets while simultaneously recognizing the reversal of an expense previously recorded.