Bad debt recovery

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Bad Debt Recovery is recovered revenues from collections that were originally written off as bad debt. (Chart of Accounuts for Health Care Organizations) Bad debts are the debts that are never expected to be realised. It is also called unrealisable or irrecoverable debts.The bad debts should be transferred to the Profit&Loss Account in the year in which the sale took place to conform to the matching concept otherwise income of the folowing accounting year will be understated. It is treated as a business loss. Bad debts recovery occurs when a bad debt is realised. Often a debt which was considered as bad and written off previosly is recovered afterwards either partly or fully. (Accounting for C.A. Professional Education Course - 1, S.K. Chakravarty)


Debt write-off

A delinquent loan becomes a defaulted loan when the chance of recovery becomes minimal. Defaulted loans result in loan write-offs. Write-offs sholud be considered after a certain period of time has passed and the loan has not been repaid. The decision to write off a loan and the timing of doing so are based on the policies of the MFI. Some MFIs choose to write loans off relativly quickly so that their balance sheets do not reflect basically worthless assets. Others choose not to write off loans as long as there is a remote possibility of collecting the loan. Regadless of when write-offs take place it is important that an MFI have an adequate loan loss reserve so that the net value of loans stated on the balance sheet accurately reflects the amount of revenue-generating assets. Once it has been determined that the likelihood of a particular loan being repaid is remote (the borrower has died, left area, or simply will not pay) a write off occurs. Write-offs are only an accounting entry. They do don mean that loan recovery should not continue to be pursued if it makes economic sence. Writing off a loan does not mean the organization has relinquished its legal claim to recover the loan. If a loan that was previosly written off is recovered (the borrwer has repaid the loan) then the full amount recovered as revenue (credit) on the income statement. This is because the principal amount write off was recorded as an expense (throught the loan loss provision that created the loan loss reserve) and therefore if recovered it is recorded as revenue and not as a decrease in outstanding loan portfolio (assets). (Microfinance Handbook, Joanna Ledgerwood)

Bad Debt Expense is acccount used for uncollectible accounts receivable and notes receivable. It is very important that consistent and justifiable method of etimating the periodic charge to provision for bad debts should be applied systematically. (Chart of Accounuts for Health Care Organizations, 1999). Many bad debts are difficult to collect and are often written off. In most cases a organizations take many steps before deeming it a bad debt. Collection attempts can continue even after the debt has been written off. Payment can still be made after the debt has been written off, making it a bad debt recovery. In periods of economic crises, the number of companies that get into difficulties increases, which results in losses in business and increased problems in the collection of claims and a greater number of bankruptcies. The most important segment of working capital management in difficult business conditions is the collection of receivables, which should ensure an adequate amount of funds and liquidity. There is a risk of bad debts in every business, because companies will always have customers who will not fulfill their financial obligations, banks, clients who will not repay their loans, health institutions of patients who will not pay their bills, and so on.

References

Author: Ivana Miškić

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