How to Present the Recovery of a Bad Debt on a Financial Statement

Although bad debt may have been written off, it still may be collected in the future.

Companies that sell their goods or services on credit terms, such as invoices due within 30 days, often will not be able to collect all of their receivables. To properly account for this economic reality, companies should estimate their uncollectible accounts and write them off as bad debts. Occasionally, however, some accounts that have been written off will unexpectedly become collectible and the financial statements should be adjusted accordingly.

Instructions

1. Apply an estimated rate for doubtful accounts. Most companies base their estimates of bad debt based upon the age of the outstanding receivables or a simple percentage of sales. The estimated bad debt results in an allowance for doubtful accounts contra-account on the balance sheet and bad debt expense on the income statement.

2. Write-off specific accounts receivable which become uncollectible. To write-off a bad debt, a company would reduce its receivable balance and reduce its allowance for doubtful accounts balance, since its status is no longer in doubt. Notably, when companies use estimates for doubtful accounts, specific write-offs do no have any impact on the income statement; these entries only impact the balance sheet.

3. Reverse the write-off, and record the recovery of the bad debt. Upon collection of a bad debt, some specific accounting procedures need to take place. Since the bad debt has already been written off, it now needs to be re-recorded. Thus, after increasing the allowance for doubtful accounts and putting the account receivable back on the books, now record the collection of the recovered bad debt normally by reducing outstanding receivables and increasing cash.

4. Consider adjusting estimates if a significant amount of bad debts is recovered. If multiple bad debts are recovered which approach a material amount, management should re-evaluate its methodology for estimating uncollectible accounts to closer reflect economic reality.

References

• Journal of Accountancy: Assessing the Allowance for Doubtful Accounts