A written-off debt that is later paid
How a client records money received for a debt it already wrote off, why revenue is left alone and how the receipt affects the year's bad debt charge.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A customer who disappeared owing a client money two years ago turns up and settles the account. The client's bookkeeper is pleased, posts the receipt against sales because there is no open invoice to match it to, and moves on. At year end, revenue is overstated and the irrecoverable debts line looks better or worse than it should, depending on how the original write-off was handled.
Recoveries are not frequent, which is exactly why they are often posted wrongly. The entry is short. Understanding why it is that entry helps the firm spot the misposting when reviewing the client's books.
Written off is not forgotten
A write-off is an accounting decision, not a legal one. The client decided the debt could no longer be shown as an asset; the customer still owes the money. ACCA's year-end adjustments article draws a useful contrast: an allowance for receivables presents receivables at a realistic value without writing the debt off, so the balance stays on the customer's account and collection continues. A write-off goes further and removes the balance from the books.
Once a debt has been written off, there is nothing left in receivables to receive the money against. That is why the receipt needs a specific entry rather than the ordinary "bank against debtor".
The entry
ACCA's article on trade receivables and revenue sets it out: when a debt already written off is later paid, the receipt is recorded as a debit to bank and a credit to irrecoverable debts, or to a separate irrecoverable debts recovered account. Revenue is not adjusted. Investopedia describes the same outcome in its own terms: payments received later for debts already written off are recorded as a bad debt recovery.
Which credit account to use is a presentation choice:
- Crediting irrecoverable debts directly reduces the year's expense. Simple, and fine where recoveries are small.
- Crediting a separate recoveries account keeps the information visible. Useful where the client recovers debts regularly, uses debt collectors, or wants to measure how well collection works after write-off.
Some clients prefer to reinstate the debt on the customer's account first and then record the receipt against it, so the customer's history shows the full story. The net effect on profit is the same; what matters is that sales are not touched.
Why revenue stays untouched
The sale happened in an earlier year and was recognised then. The write-off was an expense, not a reversal of the sale. When the cash finally arrives, it reverses part of that expense; it does not create a new sale.
Posting the recovery to revenue has knock-on effects the firm should look for:
- revenue for the year includes an amount with no matching sale, invoice or cost of sales;
- gross margin looks better than trading supports;
- revenue analysis by customer or product no longer agrees to invoices;
- where the client is VAT-registered, the revenue line no longer reconciles to output VAT on invoices issued.
On VAT, if the client claimed relief when it wrote the debt off, the recovery may have a VAT consequence. Check the current rules of the client's tax authority before finalising.
The effect on this year's bad debt charge
ACCA explains that the irrecoverable debts charge in profit or loss equals receivables written off, less last year's allowance for receivables, plus this year's allowance. A recovery credited to the same account reduces that charge further. A recovery credited to a separate account leaves the charge as calculated and shows the recovery alongside it.
A worked example in words. During the year the client writes off a handful of small balances, keeps an allowance at year end against debts that look doubtful, and receives payment on one old balance written off two years earlier. The charge for the year is the write-offs, less the allowance brought forward, plus the allowance carried forward, less the recovery if it is credited to the same account. When the firm reviews the irrecoverable debts note, the recovery should be identifiable, either inside that calculation or on its own line, so the reader can see the movement clearly.
If the year's charge is unexpectedly low, ask whether a large recovery is hiding in it. If revenue includes an unusual receipt from a customer who has had no recent invoices, ask whether it is a recovery posted to sales.
Approving the journal from the bank line
Recoveries usually first appear as an unexplained line on a bank statement. In Achekam, staff can import bank statements as PDF, CSV, Excel, OFX, QIF, MT940 or CAMT.053 files, and Achekam checks that the opening balance plus the movements equals the closing balance before the lines are worked.
A journal proposed from a bank line, a document or an adjustment is only a candidate. A person approves and posts it, and AI is refused both steps. For a recovery, that review step is where the right accounts are chosen: bank against irrecoverable debts or the recoveries account, with the customer's name and the original write-off referenced in the narration.
If a recovery was misposted to revenue in the client's books and the firm finds it at year end, staff can post a year-end adjusting entry in Achekam's Studio to move it. An adjusting entry that proves wrong is reversed with a record of who reversed it and why, never deleted.
A review checklist for recoveries
- Search revenue for receipts from customers with no invoices in the year.
- Agree any recovery to the original write-off and the customer's correspondence.
- Confirm the credit went to irrecoverable debts or a recoveries account, not sales.
- Check the VAT treatment against the client's tax authority's current rules.
- Make sure the irrecoverable debts note explains the recovery if it is significant.
Impairment of trade receivables covers the allowance side of this calculation, and explaining items on a bank reconciliation helps when the recovery shows up as an unmatched receipt. Ask clients to tell you when an old debt is paid; it takes them one line in an e-mail and saves a correcting journal at year end.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
