Definition
Bad-debt recovery refers to the process of receiving a payment on a debt that was previously considered uncollectible and had been written off as a bad debt in the company’s accounting records. This recovery can transform what was once considered a financial loss back into an asset on the company’s balance sheet.
Examples
- Business A writes off $5,000 in accounts receivable as bad debt due to a debtor’s bankruptcy. A year later, the debtor settles part of the debt, paying $2,500. This $2,500 would be considered a bad-debt recovery.
- Nonprofit Organization B decides to write off a $1,200 donation pledge that was never received. Later, the donor fulfills the pledge, and the organization recognizes this as bad-debt recovery.
Frequently Asked Questions (FAQs)
What triggers a bad-debt recovery?
A bad-debt recovery is triggered when a debtor pays off a debt previously considered uncollectible. This might occur following changes in the debtor’s financial circumstances or successful recovery efforts by a collection agency.
How is bad-debt recovery recorded in accounting?
Bad-debt recovery is recorded as income in the company’s accounting records. The journal entry typically involves debiting Accounts Receivable and crediting Bad Debt Expense or a similar income account.
Can partial payments be considered as bad-debt recovery?
Yes, any partial payment received from a debtor, post write-off, is considered a bad-debt recovery. It does not depend on whether the full amount is recovered; even a partial recuperation counts.
Does bad-debt recovery affect taxable income?
Yes, bad-debt recovery counts as taxable income. Once the uncollected debt has been written off and deducted from taxable income, its recovery reverses the effect of that deduction.
What’s the difference between bad debt and bad-debt recovery?
Bad debt refers to amounts owed that are deemed uncollectible and are written off, whereas bad-debt recovery is the process of eventually collecting these owed amounts.
What are common methods to recover bad debts?
Common methods include direct collection efforts, engaging third-party collection agencies, or taking legal action.
Can bad-debt recovery occur after multiple years?
Yes, bad-debt recovery can occur years after the initial write-off. Companies may still receive payments long after a debt has been considered uncollectible.
Related Terms
- Write-Off: Accounting action of declaring a debt as uncollectible and removing it from the company’s receivables.
- Accounts Receivable: Money owed by customers to another entity in exchange for goods or services that have been delivered or used but not yet paid for.
- Debt Collection: The process of pursuing payments on debts owed by individuals or businesses.
- Charge-Off: An accounting action that declares an asset as a loss, typically used to describe loans, receivables, or debt that businesses judge no longer collectible.
- Provision for Doubtful Debts: An estimate of the amount of accounts receivable which are expected to not be collectible.
Online References
- Investopedia: Bad Debt Recovery
- Wikipedia: Bad Debt
- AccountingTools: Accounting for Bad Debt Recoveries
Suggested Books for Further Studies
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Financial Accounting by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- Advanced Financial Accounting by Richard Lewis and David Pendrill
Fundamentals of Bad-Debt Recovery: Accounting Basics Quiz
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