Bad Debt Recovery – Allowance Method

A business had previously written off a bad debt of 2,000 using the allowance method for bad debts, but has now managed to make a bad debt recovery and has received 900 in part payment of the account.

As the business uses the allowance method, the journal entry to record the bad debt recovery is done in two steps as follows:

Step 1: Reinstate the Accounts Receivable Balance

In order to account for the bad debt recovery, it is first necessary to reinstate the accounts receivable balance for the amount received. The accounting records will show the following bookkeeping entries for the bad debt recovery.

Bad Debt Recovery – Reinstate Accounts Receivable
Account Debit Credit
Accounts receivable 900
Allowance for doubtful accounts 900
Total 900 900

Bad Debt Recovery Bookkeeping Entries Explained

Debit
The debit entry reinstates the debt previously written off to accounts receivable.

Credit
The credit entry increases the allowance for doubtful accounts as the amount previously utilized to write of the bad debt is no longer needed.

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Bad Debt Recovery – Reinstate Accounts Receivable Accounting Equation
Assets = Liabilities + Owners Equity
Accounts receivable + Allowance for doubtful accounts =  None +  None
900 – 900 = 0 + 0

In this case an asset (accounts receivable) has been increased by the debit entry, and a contra asset account (allowance for doubtful accounts), is also increased by the corresponding credit entry.

If should be noted that the effect of these two entries is to increase an asset account and a contra asset account by equal amounts. As a result of this, the value of the net accounts receivable in the balance sheet does not change.

Step 2: Record the Cash Received

Having reinstated the accounts receivable balance in step 1, the cash received is now used to clear the balance. The accounting records will show the following bookkeeping entries for the bad debt recovery.

Bad Debt Recovery – Cash Received
Account Debit Credit
Cash 900
Accounts receivable 900
Total 900 900

Bad Debt Recovery Bookkeeping Entries Explained

Debit
The debit entry records the cash received from the customer.

Credit
The credit entry clears the accounts receivable balance

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.

Bad Debt Recovery – Cash Received Accounting Equation
Assets = Liabilities + Owners Equity
Cash + Accounts receivable =  None +  None
900 – 900 = 0 + 0

In this case an asset (cash) has been has been increased by the debit entry, and another asset (accounts receivable) has been decreased by the corresponding credit entry.

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