Recovery of Bad Debt

A company records recovered bad debt as revenue.

A company's senior leadership puts into place adequate and functional debt recovery procedures to prevent operating losses resulting from customer defaults. Bad debt recovery, also called doubtful debt collection, demands time-management aptitude and good communication skills.

Definition

Bad debt consists of accounts receivable that a firm cannot recover because customers either have filed for bankruptcy or are experiencing temporary financial distress. The firm may recover debt previously classified as bad debt if customers' financial status improves.

Significance

Bad debt represents an operating expense for a company and reduces the corporate net income. Accordingly, collecting doubtful debts boosts corporate profits and liquidity levels in the short and long terms.

Function

Companies typically attempt to recover bad debts through internal or external programs. Internal receivables collection personnel usually work in the accounting department. External bill and account collectors also help firms recover doubtful accounts and arrange payment plans with customers.

Financial Accounting

Accounting principles and Securities and Exchange Commission rules require that a company reports recovered bad debt as revenue in its corporate statement of profit and loss.

References

• Investopedia: Bad Debt Recovery
• Investopedia: What Happens If a Company Doesn't Think It Will Collect on Some of Its Receivables?
• O*Net OnLine: Bill and Account Collectors