Accounting for Bad Debt Recovery

Overview

Sometimes, the company may receive the cash payment from the customer’s account that has previously been written off and removed from the balance sheet. In this case, the company needs to make the journal entry for bad debt recovery for the cash received by restating back the customer’s receivable account and account for the cash received the same way as accounts receivable collection.

The company usually writes off the receivable of a customer’s account when it is deemed to be bad debt and is clear that such an account will not be able to be collected. However, it may later receive the cash from that written-off account. In this case, it is important to properly account for the cash received as a recovery of bad debt instead of other events, such as revenue. For example, recognizing the cash received in this case as other revenues or similar items will go against the rule of accounting.

Receiving the cash from the previously written off receivable shows that the company makes an error in judgment to write off the account receivable in the first place. Hence, it needs to correct its mistake by reinstating the customer’s account back to the balance sheet before removing it in form of the receivable collection from the customer which is different from removing it in form of written off that the company has previously done.

Bad debt recovery journal entry

When the company receives the cash payment from the customer’s account that had been written off, it needs to make two journal entries for the bad debt recovery.

First, the company can make the journal entry for bad debt recovery by debiting the accounts receivable and crediting the allowance for doubtful accounts to reverse the entry that the company has previously made when writing off the customer’s account.

Account	Debit	Credit
Accounts receivable	000
Allowance for doubtful accounts		000

After that, the company can make the second journal entry for the cash received from the customer for the recovery of the bad debt by debiting the cash account and crediting the accounts receivable.

Account	Debit	Credit
Cash	000
Accounts receivable		000

The first journal entry that is made to reverse the entry that the company made when writing off the receivable of the customer’s account shows that the company made an error judgment when it wrote off accounts receivable. So, it needs to reinstate back the customer’s account.

The second journal entry of recording the cash that the company receives from the customer is the same journal entry of accounts receivable collection. Likewise, the credit of accounts receivable is to remove it back from the balance sheet after being restated as the company has received cash from the customer.

Bad debt recovery example

For example, on November 29, 2020, the company ABC Ltd. wrote off Mr. D’s account that had a balance of $800. However, on June 12, 2021, Mr. D paid the $800 amount that the company had previously written off.

In this case, the company ABC needs to make two journal entries for this bad debt recovery of Mr. D, by debiting the $800 into accounts receivable and crediting the same amount into the allowance for doubtful accounts in the first journal entry.

Account	Debit	Credit
Accounts receivable	800
Allowance for doubtful accounts		800

This journal entry is made to reverse the entry that the company ABC made on November 29, 2020, for writing off the customer’s account. Likewise, this journal entry will restate the accounts receivable of $800 back to the balance sheet of the company ABC.

In the second journal entry, the company needs to debit the $800 into the cash account and credit the same amount to the accounts receivable to remove the $800 receivable from the balance sheet in form of receivable collection.

Account	Debit	Credit
Cash	800
Accounts receivable		800

Similar to writing off accounts receivable, the recovery of bad debt affects only the balance sheet accounts; nothing changes to the income statement. As in the example, the net effect of the two journal entries above is increasing $800 of cash with the debit and increasing $800 of allowance for doubtful accounts with the credit.

In case, we have a question of where will the $800 of allowance of doubtful accounts go. It is useful to note that the estimation of allowance of doubtful accounts is usually made at period end adjusting entry. In this case, the balance of $800 of allowance of doubtful accounts will be removed at the period-end adjusting entry when the company ABC makes the journal entry for an allowance of doubtful accounts at the year-end.

This is due to the receivable account of Mr. D has already been removed as a result of the $800 cash collection. So, any % of receivables that the company estimate to be doubtful and records in the allowance of doubtful accounts will not include the receivable account of Mr. D. Hence, the $800 of allowance of doubtful accounts for Mr. D will not show up on the year-end financial statements of the company ABC.