When youoffer credit to customers, you may need to write off unpaid receivables as bad debts. However, you could end up collecting debts you write off in youraccounting books。如果发生这种情况,记录oney as a bad debt recovery.

What is bad debt recovery?

Bad debt recovery, or bad debt collection, is money your business receives after writing it off as uncollectible. During the bad debt collection process, you might collect part or all of your debt. Once you recoverbad debt, record the income, update your accounting books, and report the recovery to the IRS (if applicable).

Although bad debt recovery can help you gain back an uncollected debt, it can be time-consuming. In some cases, you might decide that the effort isn’t worth it. But if you intend to recover a bad debt, you must prepare.

Bad debt recovery process

The recovery process starts with collection attempts. If you recover bad debt, you must update your books, statements, and tax returns.

Recovering a bad debt can be a drawn-out process. Read on to learn your responsibilities during the bad debt recovery process.

Look at your debt collection options

So, how do businesses recover bad debts?

After throwing in the towel on collecting a customer’s debt, you may consider involving outside help. To retrieve lost debts, you can reach out to a collection agency orsmall business lawyer。

A collection agency or lawyer might be able to get a customer to pay you. But, the payment might come after you’ve written off the money as a bad debt. And, you must pay the collector a portion of the customer’s payment.

Update your accounting books

When a debt becomes bad, youwrite off bad debtin your accounting books. Bad debt recovery means you need to create new journal entries in your books. Your books must reflect the recovered amount.

How you create a bad debt recovery journal entry depends on your original bad debt journal entry. You can either use the allowance method or direct write-off method.

1. Allowance method

Although there are two ways to write off bad debt, many business owners choose the allowance for doubtful accounts method. When you create anallowance for doubtful accounts, you expect that some customers’ debts will go bad.

If a customer doesn’t pay, debit your Allowance for Doubtful Accounts account and credit your账户s Receivableaccount.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	Allowance for Doubtful Accounts	Lack of customer payment	X
	账户s Receivable			X

You don’t need to create a bad debts recovered account to record bad debt recovery. Instead, reverse your journal entry. Debit your Accounts Receivable account and credit your Allowance for Doubtful Accounts account.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	账户s Receivable	Bad debt recovery	X
	Allowance for Doubtful Accounts			X

After reversing your bad debt journal entry, you also need to record the income. You can debit your Cash account and credit your Accounts Receivable account.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	Cash	Bad debt recovery income	X
	账户s Receivable			X

2. Direct write-off method

企业主使用the direct write-off method deal with two accounts: Accounts Receivable and Bad Debts Expense.

To record the bad debt entry in your books, debit your Bad Debts Expense account and credit your Accounts Receivable account.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	Bad Debts Expense	Lack of customer payment	X
	账户s Receivable			X

To record the bad debt recovery transaction, debit your Accounts Receivable account and credit your Bad Debts Expense account.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	账户s Receivable	Bad debt recovery	X
	Bad Debts Expense			X

Next, record the bad debt recovery transaction as income. Debit your Cash account and credit your Accounts Receivable account.

Date	账户	Notes	Debit	Credit
X/XX/XXXX
	Cash	Bad debt recovery income	X
	账户s Receivable			X

Examine your financial statements

During the bad debt recovery process, you may need to adjust yourfinancial statements。

When you have bad debt, yourbusiness balance sheetreflects the loss. Update your balance sheet when you recover bad debt. And, increase your business’s assets on your balance sheet.

Yourincome statementdisplays your business’s income and expenses. Use your updated accounting books to change your business’s expenses andnet profit。

Make tax return adjustments (if necessary)

Did you claim a bad debt loss on yourbusiness tax return? If so, you may need to report your bad debt recovery to the IRS.

Report your bad debt recovery if your original bad debt claim lowered yourtax liability。Include the bad debt recovery funds in your business’s annual gross income.

When you recover a bad debt, you need to record the transaction. Easily update your books with Patriot’s onlinevwin055 。Record payments, track your expenses and income, and more. Get your free trial today!

This is not intended as legal advice; for more information, pleaseclick here.