Bad debts

bluesky

Hi there

I'd really appreciate some help relating to the treatment of bad debts that occur in one financial year, but are dealt with in the next.

We receive many small payments into our business account each month, and do not chase any non-payers until about 6 weeks later. At the end of our financial year, the customers who haven't paid for the last month of the financial year are treated as debtors in the final accounts, but if some of these end up as bad debts, how are they accounted for in the new financial year?

Hope this makes sense :001_unsure:
Thanks for any help.

MartynH

If you have some idea what will be the total debt to go bad you should provide for that debt in the current year then when the debt is to be written of in the next year the provision for bad debts will be the opposing entry for the reduction in your debtors account. Note you can only reclaim VAT on bad debts after 6 months so dont write off debts and reclaim VAT before that.
Hope this helps:thumbup1:

Psyche

You can have provisions both for general and specific bad debts. For the general bad debts provision, you take a percentage (based on past history) of the debts which you think will not be paid, say 5% of your total outstanding debtors, and make a year end journal of
DR bad debts expense
CR provision for doubtful debts

For specific debtors you feel will not pay, you would debit bad debts expense and credit provision for doubtful debts for that debtor. If the person then pays you would reverse this entry, and if you end up writing it off you would debit the provision account and credit the debtor account.

The provisions then stay on your balance sheet as an offset to the debtors account.

Note for tax purposes you cannot claim a general bad debts provision as a deduction from profit, but you can claim a specific one.

deanshepherd

As a practical tax tip, even where you want to make a 'general' provision you make damn sure you allocate that provision to specific debts to get the tax relief!