Recoveries are a general accounting term used to describe different types of record keeping. When an accountant needs to adjust an account because a bad debt has been repaid, that debt is though of as recovered and requires a new entry. Likewise, businesses often make new entries for various expense recoveries to show how expenses have changed over time. Recovery can also pertain to a broader type of practice associated with matching costs to value for accurate record keeping.
Bad debts are debts that the company holds but does not expect to be repaid on. Consumers use credit to buy goods or services and such debts are collected in accounts receivable, but because of credit problems, uncontrollable events and dishonesty there will always be some consumers that will not pay. Very late debts or debts that are unlikely to be paid are often moved to a separate bad debt allowance account in order to separate them from the more positive accounts receivable.
Bad Debt Recovery
Sometimes bad debts that the accountant did not expect to be paid are in fact paid at the last minute, before the debts are counted as losses permanently. In this case a bad debt recovery is needed. The accountant deducts the amount from the bad debt allowance account and puts it back in accounts receivable, then credits accounts receivable and debits cash, since the money is finally received.
In other cases, expenses can be recovered. A good example of this is a rebate. The company pays for a particular asset, such as a computer program, and records the full expense in its books. However, if the computer program costs above a certain amount the vendor may allow a 10 percent rebate. The business fills out documentation and receives the rebate. The accountant will then make a recovery entry on the expense account to show part of the money was returned and the actual expense has been lowered.
Cost recovery is a very general term that accountants use to talk about correctly collecting costs for a business. In general, both accounting principles and tax laws require that all the costs that a business incurs to make products or services be accounted for. This includes costs of production, expenses related to payroll and labor, and any miscellaneous cost for insurance, administration and taxes. These costs are "recovered" when they are all connected to value the company creates and put in specific accounts.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.