Bad Debt Recovery

Overview

The company usually write off the receivable of a customer’s account when it is deemed to be bad debt and is clear that such account will not be collected. However, it may receive the cash from the written-off account as the recovery of bad debt.

This shows that the company may make an error in judgment to write off the account receivable. Hence, it needs to properly account for bad debt recovery by reinstating the customer’s account that has been written off and journalizing the cash received as collection from the customer.

Bad Debt Recovery Journal Entry

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

Account Debit Credit
Accounts receivable xxx
Allowance for doubtful accounts xxx
Account Debit Credit
Cash xxx
Accounts receivable xxx

The first journal entry is to reverse the entry that the company made when writing off receivable of the customer’s account. This 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 is to record the cash that the company receives from the customer’s account. This is the same journal entry of accounts receivable collection.

Example

For example, on November 29, 2019, the company ABC Ltd. wrote off Mr. D’s account that had a balance of USD 800. However, on June 12, 2020, Mr. D paid the USD 800 amount that the company had written off.

In this case, ABC Ltd. needed to make two journal entries for this bad debt recovery of Mr. D below:

Account Debit Credit
Accounts receivable 800
Allowance for doubtful accounts 800
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 USD 800 of cash with the debit and increasing USD 800 of allowance for doubtful accounts with the credit.