Corporate Debt Recovery
Bad debt affects a company's cash levels in the short term and long term. Department heads partner with segment managers to identify less creditworthy customers and establish appropriate credit limit guidelines. Accountants record corporate debt recovery in the balance sheet.
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Corporate Debt Defined
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A company engages in borrowing activities to fund operating needs in the short term and long term. A debt is a liability, or loan, that a borrower must repay when due.
Bad Debt
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Bad debt represents noncollectable customer accounts. It is otherwise known as doubtful debt. A company must reduce bad debt levels to improve working capital ratios. Working capital measures short-term liquidity and equals current assets minus current liabilities.
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Importance of Debt Recovery
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A firm must recover, or collect, corporate bad debt to improve profitability indicators, such as return on equity and gross margin. Return on equity equals net income over total revenue. Gross margin equals sales minus the cost of goods sold divided by total revenue.
Accounting for Debt Recovery
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To record debt recovery, an accountant debits the allowance for doubtful accounts and credits the cash account. In accounting parlance, debiting an asset account, such as cash or inventories, means increasing its balance.
Reporting Debt Recovery
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An accountant reports bad debt expense in the statement of profit and loss, also referred to as the statement of income. He reports the recovery of bad debt in the balance sheet.
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References
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