What is the process for recording the recovery of a previously written off account receivable?
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An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results. Show
In accrual-basis accounting, recording the allowance for doubtful accounts at the same time as the sale improves the accuracy of financial reports. The projected bad debt expense is properly matched against the related sale, thereby providing a more accurate view of revenue and expenses for a specific period of time. In addition, this accounting process prevents the large swings in operating results when uncollectible accounts are written off directly as bad debt expenses. Units should consider using an allowance for doubtful accounts when they are regularly providing goods or services “on credit” and have experience with the collectability of those accounts. The following entry should be done in accordance with your revenue and reporting cycles (recording the expense in the same reporting period as the revenue is earned), but at a minimum, annually. DR Bad Debt Expense CR Allowance for Doubtful Accounts
When it is determined that an account cannot be collected, the receivable balance should be written off. When the unit maintains an allowance for doubtful accounts, the write-off reduces the outstanding accounts receivable, and is charged against the allowance – do not record bad debt expense again! DR Allowance for Doubtful Accounts CR Accounts Receivable For detailed expectations and guidelines related to write offs, see Writing Off Uncollectable Receivables. On occasion, a company may collect an account that was previously written off. For example, a customer that was once in dire financial condition may recover, and unexpectedly pay an amount that was previously written off. The entry to record the recovery involves two steps: (1) a reversal of the entry that was made to write off the account, and (2) recording the cash collection on the account: 6-16-X6 Accounts Receivable 1,000 Allow. for Uncollectible Accounts 1,000 To reestablish an account previously written off via the reversal of the entry recorded at the time of write off 6-16-X6 Cash 1,000 Accounts Receivable 1,000 To record collection of account receivable It may trouble you to see the allowance account being increased because of the above entries, but the general idea is that another as yet unidentified account may prove uncollectible (consistent with the overall estimates in use). If this does not eventually prove to be true, an adjustment of the overall estimation rates may eventually be indicated. Carefully consider that the allowance methods all result in the recording of estimated
bad debts expense during the same time periods as the related credit sales. These approaches satisfy the desired matching of revenues and expenses. A business must carefully monitor its accounts receivable. This chapter has devoted much attention to accounting for bad debts; but, don't forget that it is more important to try to avoid bad debts by carefully monitoring credit policies. A business should carefully consider the
credit history of a potential credit customer, and be certain that good business practices are not abandoned in the zeal to make sales. It is customary to gather this information by getting a credit application from a customer, checking out credit references, obtaining reports from credit bureaus, and similar measures. Oftentimes, it becomes necessary to secure payment in advance or receive some other substantial guarantee such as a letter of credit from an independent bank. All of these steps
are normal business practices, and no apologies are needed for making inquiries into the creditworthiness of potential customers. Many countries have very liberal laws that make it difficult to enforce collection on customers who decide not to pay or use "legal maneuvers" to escape their obligations. As a result, businesses must be very careful in selecting parties that are allowed trade credit in the normal course of business. Equally important is to monitor the rate of collection. Many
businesses have substantial dollars tied up in receivables, and corporate liquidity can be adversely impacted if receivables are not actively managed to insure timely collection. One ratio that is often monitored is the accounts receivable turnover ratio. That number reveals how many times a firm's receivables are converted to cash during the year. It is calculated as net credit sales divided by average net accounts receivable: Accounts Receivable Turnover Ratio Net Credit Sales/Average Net Accounts Receivable To illustrate these calculations, assume Shoztic Corporation had annual net credit sales of $3,000,000, beginning accounts receivable (net of uncollectibles) of $250,000, and ending accounts receivable (net of uncollectibles) of $350,000. Shoztic's average net accounts receivable is $300,000 (($250,000 + $350,000)/2), and the turnover ratio is "10": 10 = $3,000,000/$300,000 A closely related ratio is the "days outstanding" ratio. It reveals how many days sales are carried in the receivables category: Days Outstanding = 365 Days/Accounts Receivable Turnover Ratio For Shoztic, the days outstanding calculation is: 36.5 = 365/10 By themselves, these numbers mean little. But, when compared to industry trends and prior years, they will reveal important signals about how well receivables are being managed. In addition, the calculations may provide an "early warning" sign of potential problems in receivables management and rising bad debt risks. Analysts carefully monitor the days outstanding numbers for signs of weakening business conditions. One of the first signs of a business downturn is a delay in the payment cycle. These delays tend to have ripple effects; if a company has trouble collecting its receivables, it won't be long before it may have trouble paying its own obligations. How do you record recovery of accounts receivable?To record the bad debt recovery transaction, debit your Accounts Receivable account and credit your Bad Debts Expense account. Next, record the bad debt recovery transaction as income. Debit your Cash account and credit your Accounts Receivable account.
What is the treatment for recovery of accounts previously written off?Reverse the original write-off by crediting the bad debts expense account and debiting accounts receivable with the amount received. For example, the customer pays the debt of $1,500 in full. Reverse the original entry by crediting the bad debts expense account and debiting accounts receivable with $1,500.
What happens when a previously written off accounts receivable is collected?Bad debt recovery is a payment received for a debt that was written off and considered uncollectible. The receivable may come in the form of a loan, credit line, or any other accounts receivable. Because it generally generates a loss when it is written off, bad debt recovery usually produces income.
How does an entity record a subsequent recovery of an account previously written off?A recovery occurs when a company receives payment on an account it had previously written off. There are two steps to account for the subsequent recovery of accounts previously written off against the allowance account: Reinstate the accounts receivable and restore the allowance account. Record the cash collection.
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