Learn: What is a provision for doubtful debts? Principles and conditions for setting up a provision for doubtful debts. Instructions on how to account for a provision for doubtful debts.
I. What is the provision for doubtful debts?
Provision for doubtful debts (or provision for bad debts, provision for bad debts) is a provision for the lost value of receivables that are due but not yet collected, or debts that are not due but customers are unable to pay.
>> See more: Business receivables.
II. Conditions for setting up provisions for bad debts
To set up a provision for bad debts, businesses need to meet the following conditions:
1. Original documents are required to prove the amount that the customer has not paid.
- Economic contracts, debt commitments, loan agreements;
- Contract liquidation minutes;
- Debt reconciliation, debt reconciliation request, debt confirmation or debt collection document sent by the enterprise with the stamp of the express delivery unit;
- Detailed list of debts;
- Payment documents.
2. Basis for confirming bad debt
- Overdue receivables starting from 6 months or more;
- Receivables are not yet due for payment but the enterprise has verified that the customer is likely to not pay;
- Debts purchased from debt trading enterprises (enterprises operating under the provisions of law), the time of confirmation as overdue debt is calculated from the time of purchase.
3. Bad debt provision ratio
3.1. For overdue collections
- Deduct 30% of the value for overdue revenue from 6 months to less than 1 year;
- Deduct 50% of the value for overdue revenue from 1 year to less than 2 years;
- Deduct 70% of the value for overdue revenue from 2 years to less than 3 years;
- Deduct 100% of the value for overdue revenue of 3 years or more.
3.2. For telecommunications providers
- Deduct 30% of the value for overdue receivables from 3 months to less than 6 months;
- Deduct 50% of the value for overdue revenue from 6 months to less than 9 months;
- Deduct 70% of the value for overdue receivables from 9 months to less than 12 months;
- Deduct 100% of the value for overdue revenue of 12 months or more.
3.3. For receivables not yet due for payment
Enterprises must set aside a maximum provision of 100% of the lost value if it is verified that the customer falls into the following cases:
- Bankrupt;
- Open bankruptcy proceedings;
- Fleeing from the place of business;
- Serving a sentence under a court decision;
- Death or escape from residence.
III. Accounting principles for provisions for doubtful debts
Enterprises make provisions for bad debts and reverse provisions for bad debts at the time of preparing financial statements.
Provisions for bad debt provisions are as follows:
- In case the provision for doubtful debts at the end of this period is greater than the previous period: Record an additional increase in the provision (record the difference) and record an increase in business management expenses;
- In case the provision at the end of this period is lower than the previous period: Revert provision for bad debts (record the difference), record a decrease in provision and reduce business management expenses;
- In case of receivables over 3 years old: Enterprises can resell them to debt trading companies or write off bad debts to increase other income – Account 711.
>> See more: Accounts receivable and payable accounting services.
IV. Accounting for provision for doubtful debts
1. When preparing the year-end financial statements, determine to increase the provision for bad debts.
Additional provisions for this period are as follows:
- Debit account 642: Business management expenses;
- Credit account 2293: Provision for doubtful debts.
2. When preparing financial statements, determine the need to reverse bad debt provisions.
Accounting as follows:
- Debit account 2293: Provision for doubtful debts;
- Credit account 642: Business management expenses.
3. When the debt is not recoverable beyond the provisioning period
Enterprises conduct debt cancellation, based on the decision to cancel bad debt, accounting is as follows:
- Debit account 2293: Provision for doubtful debts;
- Debit accounts 111, 112, 331, 334: Individuals and organizations compensate for violations;
- Debit account 642: Business management expenses;
- There are accounts 138, 131, 128, 244.
4. When the debt is recovered
Accounting as follows:
- Debit account 111,112: Selling price;
- Credit account 711: Other income.
5. When the bad debt is overdue, it is sold to a debt trading company.
➤ In case no provision has been made, account as follows:
- Debit account 642: Business management;
- Debit account 111,112;
- There are accounts 131, 138, 128, 244.
➤ In case of provision, account as follows:
- Debit account 111,112: Selling price;
- Debit account 2293: Provision made;
- Debit account 642: Business management (loss part);
- There are accounts 138, 131, 128, 244.
V. Questions related to accounting for bad debt provisions
1. What is a provision for doubtful debts?
Provision for doubtful debts is a provision for the value lost due to the inability to collect due debts or debts that have not yet matured and the debtor is unable to pay.
2. What is the provision level for overdue receivables?
There are 4 levels of provision for doubtful debts as follows:
- Deduct 30% of the value for overdue revenue from 6 months to less than 1 year;
- Deduct 50% of the value for overdue revenue from 1 year to less than 2 years;
- Deduct 70% of the value for overdue revenue from 2 years to less than 3 years;
- Deduct 100% of the value for overdue revenue of 3 years or more.
>> See more: Provision for bad debt for telecommunications enterprises.
3. How is the debt that has been written off now collected through bank deposits accounted for?
For debts that have been written off but are later recovered by the enterprise through bank deposits, the accounting will be as follows:
- Debit account 112;
- Credit account 711: Other income.