Accounting Treatment &Work Flow on Write Off Bad Debts and Provision or Allowance for Doubtful Debts

The discussion is confined to amount owing by Trade Receivables and excludes any amount owing by Inter-company and Associate Debtors.

There are two (2) ways of handling loss in Trade Receivables,namely:

1. write off
2. provision or allowance made in the event of non-recoverability

For Write off of bad debts:

Here,we need to consider the time or period that the company have being owed for the debt. For example,say we have been owed by a trade debtor for more than 450 days hence we contemplate writing off this debt.

Next we should seek the necessary approval to write off these debts. The suggested method is to have a Approval for Write Off Form signed off by the necessary signatory preferably the head of business unit manager,CFO and Managing Director. This write off form and legal letters from solicitors and other supports need to be filed for future tax deductibility purposes.

The trade debtor should be written off and recorded as Write Off of Bad Debts,with a corresponding credit to knock-off the trade receivable (balance sheet ) listed in the below accounting entry.

Debit:Loss on Trade Receivables (Profit &Loss Account)
Credit:Trade Receivables (Balance Sheet)

It’s important for visibility purposes to maintain on a MEMO basis any material write-off of any trade receivables. Such receivables should be reviewed,the information updated monthly,and collection efforts continued until deemed uncollectible.
The receivables maintained on a memo basis should be removed from all records when one of the following occurs:

1. Monies are collected,
2. A collection agency or appointed company solicitors declares the debt as uncollectible,
3. Legal action against the customer has been pursued and completed,
4. The equipment has been repossessed and collection activities has stopped,

Approvals are required from the respective Business Unit Manager,Financial Controller and Managing Director in order to remove the above receivable from the memo files.
Loss on Bad Debts on Trade Debtor:
Can be either general or specific provisions and in exceptional cases where in situations the debts are recovered even though it had been written off,this will be classified as bad debt recovery and,if the debt recovered is less than full amount,the trade receivable account should not be re-instated for the remaining uncollected balance.

1. A Provision or Allowance  for Doubtful Accounts is effected by charging into the following entry:
Debit –Provision for Doubt ful/Bad debts ( Profit and Loss a/c)
Credit –Provision for Doubtful/Bad debts ( Balance Sheet item)

In order to maintain realistic company profits,there is the need to consistently update the provision or allowance  for Accounts Receivables(AR) which are deemed uncollectible.

To match profits relating to the sales,there should a provision or allowance for doubtful debt policy,for example like the following:

• 1% of trade receivable outstanding less than 180 days,
• 50% of trade receivable outstanding more than 180 days,
• 100% of trade receivable outstanding more than 360 days.

Suggestion:
It is interesting to note that most companies would place the loss in bad debts whether it is a write off or provision or allowance into the Marketing category. Hence,at times of low collections,the marketing expenses category will show very high figures deflating the profit or income of the company. Vice versa,it has the opposite effect,when recoverability or high collections will increase the income of the company.

But in reality,should we do that?

Why don’t we think that this is part of asset management. The suggested way perhaps is to have a separate line altogether from marketing,operation,etc,and coined it as Asset Management Utilisation. (Incidentally,matters relating to inventories should also be included into this line)

By doing so,two objectives can be attained:

• making sure Senior Management and the business unit manager understand the implication of too high of assets allocated into their individual profit and loss account,
• will not cause distortion into other lines ( when we have too high or low collections)

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