Journal Entry for Recovery of Bad Debts?

Question:

Q: What is the double entry for recording recovery of bad debts in control accounts?

Solution:

First of all, let's make sure we understand what bad debts are.

Bad Debts

Bad debts are debts owed to the business that have gone bad.

In other words, you don't think Joe Shmoe is going to pay you the $1,000 he owes you as he just declared bankruptcy or something like that.

What do you do? You record this unpaid debt as a loss, and we call this Bad Debts.

Here's the journal entry for recording this bad debt:

Dr Bad Debts ......................... $1,000
Cr Debtors Control ......................... $1,000

Note that the credit here is for the debtors account (also known as accounts receivable). What this means is that our debtors are less, which makes sense as we are not expecting as much money to be received anymore.

Recovery of Bad Debts

Now let's go over the journal entry for recording the recovery of bad debts.

Let's say that 2 years later Joe Shmoe's new business is doing well and he has money again and he is forced to pay you some of the money he owed you before (let's say $600). The money he pays you is now recorded as an income and we use the term Bad Debts Recovered.

Here's the journal entry:

Dr Bank ............................................................ $600
Cr Bad Debts Recovered (income) ......................... $600

As you can see, the entry above actually does not affect the debtors control account at all (you don't have to show that more is owing to us now). It is simply a recording of cash received, with the contra entry being an income account.

Technically if the debt was recoverable but not paid immediately, then you could record it in two steps:

Dr Debtors Control ......................................... $600
Cr Bad Debts Recovered ......................................... $600

Dr Bank ............................................................ $600
Cr Debtors Control .................................................. $600

This is the same as above except the money is first owed to us and then paid a bit later.

Note for US visitors, that the entries above for bad debts and bad debts recovered are using what is known as the "Direct Write-Off Method" (as opposed to an alternate method called the "Allowance for Bad Debts" method).

Hope that all makes sense!

See below for more comments, questions and answers on recovery of bad debts. And feel free to add your own.

- Michael Celender
Accounting Basics for Students

FYI full lessons and exercises on bad debts (and provision for bad debts) are only available in my basic accounting books, not on this site.

Comments for Journal Entry for Recovery of Bad Debts?

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Bad Debts Recovered by Debt Collector
by: Anonymous

What is the entry if the bad debt is recovered by a debt collection agency, and they pay us the debt recovered less their fees. Note, that the debt has already been written off and that the debt was not recovered in full. How do I account for the legal fees as well.

Thanks.

I would do the following journal entries to account for the recovered bad debts and also the expense of the debt collection agency:

Dr Bank............................................13,000
Cr Bad Debts Recovered.............................13,000

Dr Debt Collection Expense / Legal Fees... 3,000
Cr Bank..................................................................3,000

Alternatively you could combine the above as a compound entry:

Dr Bank......................................................10,000
Dr Debt Collection Expense / Legal Fees... 3,000
Cr Bad Debts Recovered.......................................13,000

Also, if you don't feel that the debt collection fees are a significant thing to report separately in your accounting records, then you could also set this off against the bad debts recovered and just record this and nothing else:

Dr Bank..........................................10,000
Cr Bad Debts Recovered..........................10,000

Hope that helps!

- Michael C.
Accounting-basics-for-students.com

Bad Debt Recovered & Retained Earnings
by: Korede

What is the journal entry for bad debt recovered but management wants it to be taken to retained earnings?

It's pretty simple, you just use the owner's equity account "Retained Earnings" instead of the income account "Bad Debts Recovered."

So the double entry would be:

DR Bank/Cash
CR Retained Earnings

Best,
Michael Celender
Founder of accounting-basics-for-students.com

Journal for a Specific Doubtful Debt Allowance Paid
by: Anonymous

What would the double entry be if you've made a specific provision for doubtful debts then the following year the customer pays? I've read conflicting answers previously.

First off, since you are receiving cash from the customer the following year, you have to record that at that point, and the contra entry to the bank/cash account would be "bad debts recovered." So you have to record this:

Dr Bank
Cr Bad Debts Recovered (income)

The next thing is to decide if you want to change your existing provision/allowance. If you believe the provision needs to now be reduced downward then you would do so through the standard entry:

Dr Provision for doubtful debts
Cr Bad debts

(this is simply a reversal of the usual entry to create or increase the provision)

Remember that your provision for bad debts is an estimate of future debts that will definitely go bad.

When running a business where there are credit customers, then it is general practice to consistently and continuously maintain a provision at a certain percentage of all the debts owed to you - for example, 1% or 3% - whatever seems most likely or realistic to go bad based on the business's history.

Hope that helps!

Best,
Michael Celender
Founder accounting-basics-for-students.com

do we have to make two ledgers of bad debts and bad debts recovered
by: manjinder

Suppose a company becomes insolvent with balance 13700 and could pay 5000 - what are the entries?

Dr Bank 5,000
Dr Bad debts 8,700
Cr Debtors control 13,700

Here we are saying that we are recording a loss of 8,700 (bad debts).

This is using the direct-write off method.

And to answer your question in the title: do we have to make two ledgers of bad debts and bad debts recovered? We create one account for "Bad Debts" (expense account) and another account for "Bad Debts Recovered" (income account). So 2 accounts.

- Michael

Bad debts Recovery By cash
by: Md. Nasim Uddin

Cash----- dr.
Bad debts Recovery ----cr.

Bad debts Recovery----- dr
Income statement --------cr.

Bad debt recovered
by: Arshia Pervaiz

Which method should we use if there is bad debts recovered? Plz tell me about this. Can we use direct write off method or allowance method use for recovering of bad debts?

You can record bad debts and the recovery of bad debts using either one of the two methods: 1) direct write-off method or the 2) allowance method.

- Michael

Double entry for bad debts
by: Anonymous

debit bad debts and credit debtors control.

Journal Entry
by: Gbotemi

1. if the details specific bad debt recovery is known:- dr the debtor (s) account and cr bad debt account, with the same amount.
then: dr cash/bank for amount recovered and cr debtors account.

2. if the details are not known.
dr cash/bank and cr bad debts account for the same amount.

provision for doubt debt
by: Anonymous

What are the journal entries of provision for doubtful debts if the past year's bad debt written off is being paid back? How do we adjust provision of doubtful debts?

1) If the past year's bad debt written off is being paid back:

Dr Bank
Cr Bad Debts Recovered (income)

2) To increase provision of doubtful debts:

Dr Bad debts
Cr Provision for doubtful debts

To decrease it, do the opposite:

Dr Provision for doubtful debts
Cr Bad debts

- Michael

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