A debt incurred from a loan, a credit line, or an accounts receivable that is recovered either in whole or in part after it had been written off or classified by the lender as a bad debt. This recovery can often actually produce income because it will typically generate a loss when it is written off by the lender.
Ways to avoid bad debt occurring:
To reduce the possibility of customer bad debt in your business you can:
- perform a thorough background check on a business before offering credit
- set safe customer credit limits
- only release goods when payment has cleared
- wait for direct deposit payment to clear before shipping any goods
- send invoices out as soon as a job is complete, or on a regular date
- clearly state all payment options and information on your invoices or contracts to make it easier for customers to pay you
- keep regular contact with your customers
- offer a small percentage discount for early payment of bills
Under the allowance method, if a specific customer's accounts receivable is identified as uncollectible, it is written off by removing the amount from Accounts Receivable. The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated bad debts expense.