Bad Debt Recovery: Definition, Journal Entry, Accounting, Tax Treatment

Follow us on LinkedIn

Companies write off debts that they deem as uncollectible. This write-off is often called bad debt. In most cases, it occurs when a debtor fails to repay their debt. When companies consider the repayment chances to be virtually low, they can write it off as a bad debt. Usually, it occurs when the debtor fails to settle their balance beyond the agreed time. Sometimes, however, companies may also recover bad debts.

What is Bad Debt Recovery?

Bad debt recovery refers to a payment that companies receive for a debt written off as bad. In other words, it represents any settlement from debtors after being considered a bad debt. Usually, bad debt recovery occurs after a long time from when companies write off a debtor’s balance. Bad debt recovery applies to any amounts owed to a company by its debtors. These can be loans, receivables, or credit facilities.

Add your business to our business directory https://harbourfronts.com/directory/ Add your business. Also check out other businesses in the directory

Bad debt recovery is often rare for companies. Once a debt goes bad, the recovery chances are unlikely. However, companies may sometimes deem a balance irrecoverable without proper consideration. On top of that, some debtors may also recover from financial difficulties and settle their unpaid amounts. In these cases, bad debt recovery occurs.

What is the journal entry for Bad Debt Recovery?

Bad debt recovery represents an income for companies. It is because the initial transaction gets treated as an expense. When a company writes off a debtor balance as bad, it uses the following journal entry.

Dr Bad debt expense
Cr Accounts receivable

When the debt is recovered, the journal entries will be the opposite. This process entails reversing the original entries recorded by recording an income. The journal entry, in this case, will be as follows.

Dr Accounts receivable
Cr Other income

On the other hand, companies must also record the cash or compensation received. Therefore, the accounting treatment of bad debt recovery must also consider that. Companies can use the following journal entry to record the recovered amount.

Dr Cash or bank
Cr Accounts receivable

Companies may also record the bad debt recovery in one journal entry. This journal entry includes the net effect of the above two accounting entries.

Dr Cash or bank
Cr Other income

What is the tax treatment of Bad Debt Recovery?

The IRS segregates bad debts into two categories, business, and nonbusiness. For companies, most bad debts fall under the former category. When a company writes off bad debt, it can deduct it from its gross income for a tax year. However, it must have included that amount in its income or loaned out cash. Besides that, it must also ensure the bad debt meets other conditions.

On recovery, the company must include that amount as a part of its gross income. However, it must have claimed that amount as bad debt earlier. If the company deducted a lower amount before, the value included in the gross income is limited to that. If the bad debt did not reduce the tax earlier, the company must exclude it from gross income for that period.

Conclusion

Bad debt is an amount written off by companies for debts they deem irrecoverable. Sometimes, though, they may recover those debts later. This process falls under bad debt recovery. The accounting treatment of bad debt recovery requires reversing the original entry. Companies must include the recovered amount in their gross income for the tax treatment.

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSThe 12 best Spanx Black Friday deals of 2023
The 12 best Spanx Black Friday deals of 2023

Spanx is hosting a Black Friday sale with discounts on their legendary shapewear, as well as deals on our favorite leggings and work pants.

Stay up-to-date with the latest news - click here
LATEST NEWSUkraine's new ATACMS shook Russia's attack helicopter fleet, but experts say Russian Ka-52 'Alligators' are still a threat to the front lines
Ukraine's new ATACMS shook Russia's attack helicopter fleet, but experts say Russian Ka-52 'Alligators' are still a threat to the front lines

The October 17 cluster missile strikes on two Russian airfields destroyed over a dozen helicopters, including several Ka-52s.

Stay up-to-date with the latest news - click here
LATEST NEWSUkrainian forces blew up a dance hall where an actress was performing for Russian troops: reports
Ukrainian forces blew up a dance hall where an actress was performing for Russian troops: reports

The Russian actress was killed in the strike along with 20 Russian soldiers, according to the BBC.

Stay up-to-date with the latest news - click here
LATEST NEWSTarget might limit you to just 10 items at self-checkout registers
Target might limit you to just 10 items at self-checkout registers

Target is experimenting with a 10-item limit at self-checkout kiosks at some stores as the retailer grapples with theft and other forms of product loss.

Stay up-to-date with the latest news - click here
LATEST NEWSAnalysis-Canada's EV charging strategy reaches fork in the road
Analysis-Canada's EV charging strategy reaches fork in the road
Stay up-to-date with the latest news - click here

Leave a Reply