Provision for Bad Debts "dispute"

System
System Posts: 100,537 🤖 Admin 🤖
edited June 9 in AAT member discussion
Hi
For the first year ever I would like to make a provision against a customer possibly not paying.
The S/L (debt owed) is £8,019.38.
I would post a 2 line journal DR P&L Provision for Bad Debts £8,019.38 and CR B/Sheet Provision for Bad Debts £8,019.38 and net off against Debtors in Current Assets.

If still unpaid and I wished to write it off sometime next year, then I would generally raise a Credit Note to recover the VAT. This would DR P&L sales £6,825, DR B/Sheet VAT £1,194.38 and CR B/Sheet Debtors £8,019.38. I would then post a journal reversing my previous years journal i.e CR P&L Provison for Bad Debts £8,019.38 and DR B/Sheet Provison for Bad Debts.

However, I am being advised that this years provision must be posted as follows: Dr £6,825 to P&L Provision for Bad Debts, DR VAT B/Sheet £1,194.38 and CR B/Sheet Provision for Bad Debts £8,019.38. I do not agree with the VAT adjustment at this stage as I am not applying for Bad Debt Relief, raising a Credit Note or writing the debt off.

Does anyone have a take on this please, or possibly encountered this scenario before?

Caroline

Comments

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    I think (don't quote me) that you automatically get bad debt relief after 6 months of the debt being outstanding - if that is correct why wait any longer for nearly £1,200 - it belongs the company not to Gordon - sorry darling Darling :lol::lol:
    Bad joke I know, but I've been working since 5am - so I reckon I am allowed some leeway!

    Claudia
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Generally what Caroline has originally suggested I would agree as the provision is being recognised only and is not a write off yet.
    However, depending on the age of the debt as Claudia memtioned after 6 months you able to claim bad debt relief.
    You could argue that it could be written off then as it can always be written back if eventually it was paid.

    Ps. Good to have you back Claudia, long time no hear :)

    Sharon
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Hi Sharon

    Too much work - not enough time - and never any emails from AAT saying a reply has been posted - has made me rather hit and miss on here, and also boring threads.......

    Claudia

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    ahh.... :-o
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    umm :-o
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Hi

    If making provision for a specific bad debts' surely the first journal would be as you say DR bad debt in the profit & loss account with the gross amount and CR a “provisions for bad debt accounts” on the balance sheet just under the Trade Debtors….

    If then in the next year the customer didn’t pay and let’s say went into liquidation, then it would be at this point that you would reverse you last year’s journal for the provision of a bed debt; post a new journal DR the profit & loss account for the net amount; DR the VAT control with the VAT element of the bad debt and CR the trade Debtors’ account with the gross figure…although you would end up with the VAT element of the debt as a credit balance on the bad debts written off…which you are just writing back to profits in the next period anyway

    I wouldn’t think the HMR&C would be too delighted if you were to DR the VAT control, essentially reclaiming the VAT element on a bad debt provision….Umm it’s just a thought.

    On another note tho surely if you were to DR the sales account in the next period as you say you would be understating your sales for the year. At the end of the day your sales should still be the same value whether a debt has gone bad or not…..

    It's just a thought!

    Apologies for butting in…..
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Hi all,
    Bb - I 100% agree with you.
    I look after 3 associated limited companies, separately VAT and company registered and I am looking to provide in one company against one of the others (corporation tax payable reduction).
    My auditor says that I must make the provision his way i.e. DR net to P&L provision, DR VAT B/Sheet and CR B/Sheet provison with gross - otherwise I am understating my sales for the year in which I provide.
    I am saying to him that providing the gross may give the impression of understating your sales for the year but a provision is essentially an overhead in my eyes at this stage, and so my sales will still be declared as they are (paid or unpaid) - I am in effect increasing my overheads, no VAT adjustment necessary. I am not netting the provision off against my sales in the P&L.
    All tutoring teaches you is e.g. "to provide 2½% of your debtors take 2½% of the debtors total" - this gives the impression of being on the gross. The accounting entries are always explained as just a 2 line journal, no VAT adjustment mentioned.

    Doing it the Auditors way I will now have a reconciling entry on the VAT control as I am not writing it off and will not be reclaiming the VAT (I know I could as the debt is over 6 months) but I do not want to put the onus on the associated company to pay back the VAT element to HMRC. In all probability the asociated company will come good next year and I will just write the provision back.

    Can anyone point me to a book or a website that specifically tells you the correct accounting entries for a provision and then a write off, and when to adjust the VAT?

    Please anyone butt in if it will help me "argue" my case correctly.
    Caroline

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Hi Caroline

    Not sure where you would get a book or which site you would need to go to, but suppose from a logical point of view a provision is a provision and only that…for example you wouldn’t DR the VAT control if you were posting a year-end accrual….the entry would be Dr net expense in the P&L and CR Accruals (net amount)….that’s it, and it would be the same for a prepayment. In essence a provision of bad debt is no different – it’s still only a provision, so there is no way you can reclaim the VAT element or even post it anywahere at this point….

    I’m sure the point that the VAT can be reclaimed, and it’s from a technical point (but I do stand to be corrected), but once you have writing to the customer informing them that the debt is now being written off, also ensuring that the debt is at least six months old….if you followed these procedures the transaction is no longer a provision – it had actually crystallised into become “bad”, therefore you would be entitled to reclaim the VAT now….

    I’m sure that’s correct, but again i do stand to be corrected….

    Regards
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Hello again

    The FD, although disagreeing with the Auditor, has deemed him the "expert" and so the books are being closed with a reconciling entry against VAT - I am not happy about it.
    A provision is a provision is a provision - again I totally concur with your thinking Bb, but here endeth the matter - at least for this year.

    I'm trying not to be incredibly frustrated by it - but I do get possessive about "my" books.

    So I'll sign off on this one now - thanks to everyone who posted

    Caroline :(
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Caroline

    It’s a typical scenario really isn’t it Caroline….you would have thought the FD would have known better and questioned the auditor - having said that I do know of FD’s that have no formal accounting qualification whatsoever, so on the grounds of that what can you do…

    I know if i disagreed with the "auditor" i would challenge his judgment and his superiors if the need be….

    Still you have done your best and tried to advise accordingly….

    Best regards
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    I did challenge - I held up closing the books for a few months, and the auditor & I were in danger of falling out forever, so I passed it up and ...... the rest is now known.

    I'm a fighter - I love working where I do, but this is the first time in 5 years the auditor has challenged my year end figures - mind you it's the first time I've made a provision.

    I'm a female I won't forget...... :)

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Following on from this query, I read somewhere that the VAT man doesn't like credit notes as a way of claiming bad debt relief but how else do you do it with Sage which doesn't properly journal to the control accounts?
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Could you not raise a credit note and point it towards the bad debt nominal code rather than the sales code, or raise a credit note as normal, then post a journal cr sales and dr bad debt write off….

    It’s just a thought?

    Regards
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Bless ya cottons hun....i would have taken into the boxing ring Caroline and sorted it over twelve 3 minutes rounds..... :P

  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    .
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    Apologies - I have edited my original post as I read further on in your thread. I have since started from the beginning!!

    I work as an auditor and can agree with your auditors journal.

    I suspect tax relief will have been granted against the bad debt provision as it is a specific provision rather than a general provision.

    In order to obtain the tax relief, the whole originating entry has to be reversed (including the VAT) and recognised as bad debts in the Profit and Loss Account. The VAT bad debt relief can be claimed after a six month period and after which you have notified the company that you will be writing the debt off. If you do not reverse the whole originating entry, HMRC could argue that you are claiming tax relief on a bad debt provision that isn't really a bad debt at all. After all, general provisions (2% of debtors etc) are not allowable, whereas specific debts e.g. an debt owed by ABC Ltd as a specific bad debt is allowable.

    If you re-instate the debt, then obviously the reversal journal will be debit provision for bad debts (b/s) credit VAT and credit bad debt provision in the P&L.

    Hope that helps.

    Kind regards
    Steve
  • System
    System Posts: 100,537 🤖 Admin 🤖
    Re:Provision for Bad Debts "dispute"

    .

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