Radhika (CA Final) (194 Points)
08 May 2010Hello every one..
after what period one should classify debtors into provision for bad debts and subsequently after lapsing of what period that provision should be written off as bad debts? are there any statutory provisions for classification of debtors into proviso and then into bad debts according to age wise analysis???
Regards,
Radhee
| Originally posted by : Radhika | ||
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Hello every one.. after what period one should classify debtors into provision for bad debts and subsequently after lapsing of what period that provision should be written off as bad debts? are there any statutory provisions for classification of debtors into proviso and then into bad debts according to age wise analysis??? Regards, Radhee |
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there is no such period that will classify debtor as bad debts......
however after 3 years the debts become time barred under limitation act 1963.
means they cant be claimed.....
however you can make provision for bad debts at any time but this deduction will not be allowed under income tax and hence it will create deferred tax liability under AS-22
Ram Avtar Singh
(Nagari Sultanpur U.P.Delhi)
(14497 Points)
Replied 08 May 2010
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WHAT IS BAD DEBT WRITTEN OFF? |
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Nowadays the company needs to extend credit to its customers. If the company insists on cash term, it will drive away the customers. This might be worsened if other competitors are able to extend generous credit terms to the customers. In the real world of doing business, there will definitely be some of these customers that cannot pay up their debts. To ensure that this type of doing business expenses can be charged/expensed off into the Income Statement so that the profit will not be overstated, we need to create an accounting entry called bad debt written off. What’s it really mean is to write off the irrecoverable amount of the trade debtors and directly charged/expensed into the Income Statement. |
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Illustration: Say the Company has an accounting period from 1 st January to 31 st December. It has billed customer A for $10,000 in mid- January’06. By September’06, customer A only paid $8,000. The customer A has become bankrupt and has absconded leaving the amount $2,000 unpaid. (1) The original double entry when the Company billed customer A is: Debit : Trade Debtor (Balance Sheet) $10,000 Credit: Revenue( Income Statement) $10,000 (2) Next, the Company needs to initiate the following entry to write off the bad debt of customer A: Debit: Bad Debts Written Off (Income Statement) $2,000 Credit: Trade Debtor Accounts ( Balance Sheet ) $2,000 |
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However, we need to understand that bad debt write off is not consistent with the Matching concept. The billing to the customers might not really turn irrecoverable or bad during the year it has been billed. Say for the above illustration, we assume that customer A only become a real bankrupt and has absconded only in the middle of year 2007. So what should the Company do? Hence, the need to look at another way of handling this irrecoverable debt which is called: |
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PROVISION FOR DOUBTFUL DEBTS: |
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Provision For Doubtful debts takes into consideration that when a company conducts it business, there is bound to be some billings during the year whereby the customers might not be able to pay hence eventually turning bad. If this occurs during the accounting year then the company can DIRECTLY write it off in the Income Statement, otherwise a Provision needs to be created for these doubtful customers. |
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Illustration: Debit: Provision for doubtful debts ( Income Statement) XX Credit: Provision for doubtful debts ( Balance Sheet) XX Being provision for doubtful debts For Balance Sheet’s presentation: Trade Debtors YYY Less: Provision for doubtful debts (XX) Net Trade Debtors ZZZ [ In my earlier article on provision, this provision for doubtful debt instead being a credit amount and classify as liabilities, it is classify as an asset side SO AS TO REDUCE THE VALUE OF THE ASSET in this case, Trade Debtors Account |
Ankit CA and CS
(Manager - Accounts)
(204 Points)
Replied 08 May 2010
It depends on case to case basis. Management comments are vital in these sort of things. Suppose a Debt is due from 8 -9 months you go to the management for explanation he might show you some proof that the amount will be recovered.
From my practical experiance, provision depends on management comments.
vikash rathi
(Chartered Accountant)
(787 Points)
Replied 08 May 2010
CA Lalit
(Consultant)
(50 Points)
Replied 08 May 2010
Classification of debtors and its provisions depends on the management views on the debt receivable.
if the management is satisfied that the company is likely to realise a specified percentage of the amount of debt ,then provision should be made for the rest amount.
Bhoj Adhikari
(2 Points)
Replied 01 December 2020
CAclubindia
