Bad debt reserves in Accounts receivable

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This topic provides data about the tax registers for receivables, hopeless debts, and their write-off.

Accounts receivable are formed based on outstanding invoices and advances that have been issued. Accounts receivable are considered bad if they aren't repaid within the flow that was agreed on in the contract. Hopeless debts are debts that can be written off. An example is a debt that lasts more than 3 years.

The amounts of bad and hopeless debts are identified during the inventory of accounts receivable and are included in the assart for bad debts reserve. The inventory is done on the end date of the previous revenue enhancement menstruation.

The bad debts reserve for profit tax accounting purposes is formed based on the number of days that the payment period is exceeded by:

  • Fewer than 45 days: Arrears aren't included in the reserve.
  • Between 45 and 90 days: The reserve corporeality is 50 percent of the outstanding amount.
  • More than xc days: The reserve amount is 100 percent of the outstanding amount.

The amount of the reserve for turn a profit tax accounting can't exceed 10 percent of the revenue for the reporting tax period. This amount is adjusted for the reserve residual of the previous period:

  • If the corporeality of the current quarter'south reserve is less than the corporeality of the previous quarter'southward reserve balance, the departure is included in non-operating income when the reserve amount for the reporting menstruum is formed.
  • If the corporeality of the electric current quarter's reserve is more than the amount of the previous quarter'due south reserve remainder, the difference is included in non-operating expenses when the reserve amount for the reporting menses is formed.

The bad debts reserve can exist used to cover but hopeless debts:

  • If the reserve amount is more the amount of hopeless debts that are written off, the difference is transferred to the next reporting menstruation.
  • If the reserve amount is less than the amount of hopeless debts that are written off, the divergence is included in non-operating expenses that reduce the taxable base of turn a profit.

The following tax registers provide information about accounts receivable and calculate the bad debts reserve in turn a profit revenue enhancement bookkeeping and business bookkeeping:

  • Taxation registers for the inventory of accounts receivable:

    • Accounts receivable inventory act
    • Accounts receivable inventory deed (business accounting)

  • Tax registers for calculating the bad debts reserve in accounts receivable:

    • Accounts receivable - bad debts reserve
    • Accounts receivable - reserve (business organization accounting)
    • Accounts receivable - reserve details
    • Accounts receivable - reserve details (business accounting)

  • Tax registers for collecting information about the movement of the bad debts reserve in accounts receivable:

    • Accounts receivable - bad debt reserve movement
    • Accounts receivable - reserve motility (business concern bookkeeping)
    • Accounts receivable - reserve movement details
    • Accounts receivable - reserve movement details (business accounting)

  • Tax registers for collecting information about the motility of accounts receivable:

    • Accounts receivable movement
    • Accounts receivable movement (business accounting)

If you manually calculate taxation registers one past one, consider using the following sequences for tax register calculation. If you calculate all tax registers together for the menstruum, these sequences volition automatically exist used.

When you create the revenue enhancement register journal for the current menstruation, y'all should presume that the revenue enhancement registers for the previous period were calculated in the following way:

  1. At the stop of the previous menstruum, a tax register for the inventory of accounts receivable should have been calculated.
  2. At the end of the previous period, a tax register for the calculation of the bad debts reserve in accounts receivable should have been calculated, based on the tax annals for the inventory of accounts receivable. This annals is the bad debts reserve for both the current period and future periods.

When yous calculate tax registers for the electric current period, consider the following sequence of steps:

  1. During the current period, run the write -off procedure for some debts that were recognized as hopeless before the end of the previous period, or that became hopeless during the current flow.
  2. Based on the information at the end of the previous period, and all operations during the current period, calculate the tax register by collecting information nigh the movement of accounts receivable.
  3. Summate the tax register by collecting information most the movement of the bad debts reserve in accounts receivable. This register contains all the data nearly the movement and use of the reserve that was calculated at the end of the previous menstruation.
  4. At the end of the current flow, calculate the tax register for the inventory of accounts receivable. This register represents the status of all accounts receivable.
  5. At the end of the electric current period, calculate the tax register for the calculation of the bad debts reserve in accounts receivable. This annals is the bad debts reserve for time to come periods.

Setup

Create and fix up two debts calculation models

Debts can be calculated for profit tax accounting purposes and business organization bookkeeping reports. Create ii models, 1 for business accounting and ane for tax accounting.

  1. Go to Revenue enhancement > Setup > Profit tax > Debts adding models.

  2. On the Action Pane, select New to create the first of the 2 models.

  3. In the Model number field, enter the curt name of the model. For example, name the model for business accounting RAP and the model for revenue enhancement accounting Tax.

  4. In the Description field, enter a detailed description of the model. For example, enter Business bookkeeping for the RAP model and Tax accounting for the TAX model.

  5. On the Full general FastTab, set the post-obit fields:

    • In the Flow types field, select the calculation period. For case, select Months for the RAP model and Quarters for the Revenue enhancement model.
    • In the Accounting policy field, select Accounting object or Total.
    • Get out the Reserve limit sequence field set up to 0 (zero). You lot will configure the sequence later.
    • Set up the Reserve limit on the menstruation adjustment selection to Aye to apply the reserve limit only to the revenue adjustment for the current reporting menses.

  6. If you chose Accounting object in the Accounting policy department (for example, for RAP), on the Client posting and Vendor posting FastTab, fix up the ledger accounts and expense/income codes for the bad debts reserves posting:

    1. Select Add together.
    2. In the Account code field, select Tabular array, Grouping, or All.
    3. In the Account/Group number field, select the client or vendor business relationship number if you lot selected Table in the Account code field. If you selected Group in the Account lawmaking field, select the customer or vendor grouping number.
    4. In the Unrealized losses account field, select the ledger account to apply to mail service losses in transactions on bad debts. For case, select account 91 non-operating income and expenses for the RAP model and account Н91 non-operating income and expenses in Taxation for the Tax model.
    5. In the Unrealized income business relationship field, select the ledger business relationship to apply to post income in transactions on bad debts. For example, select account 91 non-operating income and expenses for the RAP model and account Н91 off-remainder sheet business relationship for income for the TAX model.
    6. In the Bad debts reservation business relationship field, select the ledger account to use to form the bad debts reserve. For example, select account 63 reserves for bad debts for the RAP model and account Н63 reserves for bad debts for Tax for the Taxation model.
    7. In the Expense code field, select the expense lawmaking to link to the transaction for creating the bad debts reserve and writing off hopeless debts.
    8. In the Income code field, select the income code to link to the transaction for including the bad debts reserve in not-operation income.
    9. For the TAX model only: In the Summary account field, select the ledger business relationship to employ to beginning the account that yous selected in the Bad debts reservation account field to write off bad debt transactions. For example, select account Н62 off-balance sheet account for business relationship receivable.

    Annotation

    For the RAP model, the ledger account from the client posting contour is used for this purpose.

    Creating models on the Debts calculation models page.

    Alternatively, if you selected Total in the Accounting policy field, you lot consummate the setup on the General FastTab instead of the Customer posting and Vendor posting FastTabs. Set the Unrealized losses account, Unrealized income business relationship, Bad debts reservation account, Expense code, Income code, and Summary account fields as described in the preceding substeps.

  7. On the Debt interval FastTab, prepare upward the percentage that is used to calculate the bad debts reserve, depending on the number of overdue days:

    • In the Period debt type field, specify Hopeless, and and so select Add to create a bad debts interval.
    • In the From field, enter the lower limit of the debt interval, in days, for the current line. The Days and Annals fields are automatically filled in.
    • In the Pct field, specify the pct of debt that is included in the reserve for the electric current line.
    • In the Description field, enter a detailed clarification of the debt interval.

    The following illustration shows an example of the setup for a debt interval. For debts that are more than than 70 days overdue, the reserve is calculated equally 100 percent. For debts that are overdue between l and 70 days, the reserve is calculated equally eighty percent. For debts that are overdue by fewer than 50 days, no reserve is calculated.

    Debt interval setup for a model on the Debts calculation models page.

  8. Repeat steps 2 through seven to create the second model.

Set up the models for tax and business organisation accounting

  1. Go to Accounts receivable > Setup > Accounts receivable parameters.

  2. On the Ledger and sales tax tab, in the Debtor debts section, in the Model number for concern accounting field, select RAP.

  3. In the Model number for tax bookkeeping field, select TAX.

    Setting up the models on the Accounts receivable parameters page.

Create and prepare up registers

Depending on the settings of your debts calculation models, create and calculate the registers in each grouping of registers. For more than information, see Create tax registers and the tax register journal.

Annals blazon Annotate
Tax registers for the inventory of accounts receivable
Accounts receivable inventory human activity For the TAX model
Accounts receivable inventory deed (business accounting) For the RAP model
Tax registers for calculating the bad debts reserve in accounts receivable
Accounts receivable - bad debts reserve For the TAX model when the Bookkeeping policy field is gear up to Total
Accounts receivable - reserve (business accounting) For the RAP model when the Accounting policy field is prepare to Total
Accounts receivable - reserve details For the Revenue enhancement model when the Accounting policy field is gear up to Accounting object
Accounts receivable - reserve details (business organization accounting) For the RAP model when the Accounting policy field is set to Accounting object
Revenue enhancement registers for collecting information virtually the movement of the bad debts reserve in accounts receivable
Accounts receivable - bad debt reserve movement For the TAX model when the Accounting policy field is set to Total
Accounts receivable - reserve movement (business bookkeeping) For the RAP model when the Accounting policy field is set to Total
Accounts receivable - reserve movement details For the TAX model when the Accounting policy field is ready to Accounting object
Accounts receivable - reserve movement details (business bookkeeping) For the RAP model when the Accounting policy field is set to Accounting object
Taxation registers for collecting data nearly the motion of accounts receivable
Accounts receivable motion For the Revenue enhancement model
Accounts receivable movement (business concern accounting) For the RAP model

Set up a limit for the bad debts reserve in tax accounting

  1. Become to Tax > Setup > Profit tax > Rates.

  2. On the Action Pane, select New to create a rate.

  3. In the Charge per unit lawmaking field, enter the unique code of the charge per unit.

  4. In the Adding method field, enter Whole amount.

  5. On the Values FastTab, in the Start date field, enter the first engagement when the value of the rate will be used in the sequence of calculation.

  6. To set the reserve amount, in the Value field, enter the percentage of revenue. For example, enter 0.10.

    Creating a rate on the Rates page.

  7. Get to Tax > Setup > Turn a profit revenue enhancement > Debts calculation models.

  8. On the Action Pane, select Sequence of calculation to create a reserve limit sequence for revenue.

  9. In the Channel reference field, specify the annals code for the tax model.

  10. On the Activity Pane, select Counters.

  11. Select New to create a counter.

  12. In the Description field, enter a description of the counter.

  13. In the Expense code field, select the expense code of the revenue.

  14. On the Lines FastTab, create settings for calculating the revenue and reserve limit.

Creating a counter on the Counter setup page.

For more information about how to set upwards sequences of calculation, meet Sequence of calculations.

  1. Go to the debts calculation models that you created earlier, and in the Reserve limit department, in the Reserve limit sequence field, enter the sequence for each model.

Set up a number sequence for the write-off of hopeless debts

  1. Go to Accounts receivable > Setup > Accounts receivable parameters.
  2. On the Number sequences tab, in the Number sequence code field, select the number sequence code for the Ledger voucher for debts amortization reference.

Exclude agreements from reserve calculation

For more information about how to create and set upwardly agreements, see Set up and create agreements.

Past default, sales agreements are included in the calculation of the bad debts reserve. To exclude an agreement from the calculation, follow these steps.

  1. Go to Accounts receivable > Orders > Sales agreements, and select the sales agreement to exclude from the adding.
  2. Switch to the Header view, and then select Edit.
  3. On the Financial FastTab, in the Debtor debts field, specify Exclude from reserve in business accounting, Exclude from reserve in revenue enhancement bookkeeping, or both.
  4. Select Save.

Tax registers

Tax registers for the inventory of accounts receivable

In that location are two registers in this group.

Register Annotate
Accounts receivable inventory act For the Taxation model
Accounts receivable inventory human activity (business accounting) For the RAP model

These registers reflect the remainder of accounts receivable at the finish of the reporting period. Accounts receivable are formed based on outstanding customer invoices and advances that are issued to vendors. All outstanding invoices are divided into categories that are divers on the Debt interval FastTab of the Debts adding models page. The difference in days between the inventory date and the invoice due engagement determines the excess of the debt repayment menstruation.

The post-obit illustration shows an example of the Accounts receivable inventory act folio.

Example of the Accounts receivable inventory act page.

For each register line, you can review the information in the following columns:

  • Line number
  • Accounting object – The number of the client invoice or vendor prepayment.
  • Transaction date – The appointment of the certificate that is shown in the Accounting object cavalcade.
  • Expressionless line – The date that the debt must be repaid by.
  • Exclude from reserve – A selected checkbox indicates that the certificate is excluded from reserve calculation. Yous tin change this value by selecting Edit on the Action Pane. In that case, you must recalculate the dependent registers.
  • (Debt intervals ) – In that location is a separate column for each debt period that y'all configured earlier (for instance, Debt >=0 <45, Debt >=45 <90, and Debt>=90 <360). Each column shows the amount of bad debt for the corresponding debt menstruation.
  • Not-confirmed debt – Enter the corporeality of non-confirmed debt by customer. This column is available only for the RAP (business concern bookkeeping) model.

Taxation registers for calculating the bad debts reserve in accounts receivable

At that place are iv registers in this grouping.

Annals Comment
Accounts receivable - bad debts reserve For the Revenue enhancement model when the Accounting policy field is set to Full
Accounts receivable - reserve (business accounting) For the RAP model when the Accounting policy field is set to Total
Accounts receivable - reserve details For the TAX model when the Accounting policy field is ready to Accounting object
Accounts receivable - reserve details (business accounting) For the RAP model when the Accounting policy field is set up to Accounting object

These registers reverberate the amount of the reserve that is calculated for the current reporting period, based on the information in revenue enhancement registers for the inventory of accounts receivable. The Reserve cavalcade shows the reserve corporeality . This reserve volition exist used in the future to write off hopeless debts.

The Reminder column shows the reserve residuum for the previous menstruation. The value is taken from the tax registers for collecting information nearly the movement of the bad debts reserve in accounts receivable. If the column is blank, the balance is considered to be 0 (null). The Expense and Revenue columns show the difference between the calculated reserve for the current reporting period and the rest of the previous period. This departure is after posted to the ledger accounts for not-operating income or non-operating expenses.

The post-obit illustration shows an example of the Accounts receivable- reserve details page.

Example of the Accounts receivable reserve details page.

On each register line, yous can review the information in the following columns:

  • Line number
  • Accounting object: The number of the customer invoice or vendor prepayment. This cavalcade is available only for registers that use the Accounting object bookkeeping policy.
  • Posting engagement: The engagement of the document that is shown in the Accounting object column. This column is available only for registers that utilise the Accounting object accounting policy.
  • Dead line: The date that the debt must be repaid past. This cavalcade is available only for registers that employ the Bookkeeping object bookkeeping policy.
  • (Debt intervals): There is a separate column for each debt period that you configured earlier (for example, Debt >=0 <45, Debt >=45 <xc, and Debt>=xc <360). Each column shows the amount of bad debt for the corresponding debt period.
  • Accounts receivable amount: The corporeality of outstanding debt for the accounting object on the current line.
  • Reserve limit: The amount of the bad debt reserve limit for the electric current reporting period. This amount is calculated according to the sequence that you configured before.
  • Reserve: The total amount of the bad debts reserve.
  • Residual: The reminder of the bad debts reserve from the previous reporting menstruation.
  • Expense: The amount of the bad debts reserve for the current reporting flow that is included in the expense.
  • Revenue: The amount of the bad debts reserve for the current reporting period that is included in income. For example, the bad debts reserve was already created, just the outstanding debt was repaid.
  • Ledger voucher for reservation: The number of the document that was used to post the ledger journal for accounts receivable bad debts reserves. This cavalcade is bachelor only for registers that use the Total accounting policy.
  • Date: The date of the current reporting period. This column is available merely for registers that utilise the Total accounting policy.

Create a ledger journal for accounts receivable bad debts reserves

  1. Become to Tax > Journal entries > Tax register journal.

  2. Select the line where the Accounts receivable - bad debts reserve annals for total bookkeeping or the Accounts receivable - reserve details register for object bookkeeping is calculated and approved.

  3. On the Activity Pane, select Ledger periodical > Accounts receivable - bad debts reserve.

  4. On the Action Pane, select Create >Create journal.

    The journal is created. Its lines testify the vouchers for calculating amounts of the reserves for the electric current catamenia. The amounts of the reserves are calculated in the grouping of Accounts receivable - reserves registers.

  5. On the Action Pane, select Lines to view the vouchers and other details.

    Journal voucher page.

  6. On the Action Pane, select Post > Post to post the journal.

Create a reversing entry ledger periodical for accounts receivable bad debts reserves

  1. Go to Revenue enhancement > Journal entries > Revenue enhancement register journal.

  2. Select the period where the Accounts receivable - bad debts reserve register for full bookkeeping or the Accounts receivable - reserve details annals for object accounting is calculated and approved.

  3. On the Action Pane, select Ledger journal > Accounts receivable - bad debts reserve.

  4. On the Action Pane, select Create > Opposite journal.

    The journal is created. Its lines show the vouchers for calculating amounts of the reserves for the current period. The amounts of the reserves are calculated in the group of Accounts receivable - reserves registers.

  5. On the Action Pane, select Lines to view the vouchers and other details.

  6. On the Action Pane, select Post > Post to mail the periodical.

    Creating a reverse journal on the Accounts receivable bad debts reserve page.

Tax registers for collecting data well-nigh the movement of the bad debts reserve in accounts receivable

In that location are 4 registers in this grouping.

Register Annotate
Accounts receivable - bad debt reserve movement For the Tax model when the Accounting policy field is set up to Full
Accounts receivable - reserve motion (business accounting) For the RAP model when the Bookkeeping policy field is set to Total
Accounts receivable - reserve movement details For the TAX model when the Bookkeeping policy field is set to Bookkeeping object
Accounts receivable - reserve movement details (concern accounting) For the RAP model when the Accounting policy field is ready to Accounting object

These registers summarize information nigh the movement and use of the bad debts reserve. They are calculated based on the results of the formation of the bad debts reserve and the use of the bad debt to write off hopeless debts.

Annotation

The write-off of hopeless debts is processed by using the bad debts reserve that is created at the cease of the previous period.

The following illustration shows an example of the Accounts receivable - reserve movement details folio.

Example of the Accounts receivable reserve movement details page.

On each register line, you can review the information in the following columns:

  • Line number
  • Accounting object: The number of the customer invoice or vendor prepayment. This cavalcade is available only for registers that use the Accounting object accounting policy.
  • Posting appointment: The appointment of the document that is shown in the Accounting object column. This column is bachelor just for registers that use the Bookkeeping object accounting policy.
  • Dead line: The date that the debt must be repaid past. This column is available simply for registers that employ the Accounting object accounting policy.
  • Engagement: The engagement when the reserve was created.
  • Reserve: The total corporeality of the bad debts reserve that was calculated at the end of the previous period.
  • Hopeless: The corporeality of the hopeless debts that were written off during the current period.
  • Used: The amount of the reserve that was used to write off hopeless debts.
  • Residue: The remaining corporeality of the bad debts reserve from the previous menstruum afterward use.
  • Excess: The corporeality of written-off hopeless debt that exceeds the amount of the bad debts reserve on the reporting date. This corporeality is included in the not-operating expenses for the current period.

Revenue enhancement registers for collecting data nearly the motion of accounts receivable

There are two registers in this group.

Register Comment
Accounts receivable movement For the Tax model
Accounts receivable move (business organization accounting) For the RAP model

These registers summarize information nearly operations for the movement of receivables to place the amounts of bad debts (then that a reserve can be formed) and hopeless debts (so that they can be accounted as function of expenses).

The registers reverberate all facts about the occurrence, payment, or write-off of accounts receivable from the beginning of the tax flow to the reporting appointment. The amounts of overpayments to budgets of unlike levels aren't reflected in these registers.

For transactions in strange currencies, records are as well fabricated for each revaluation of debt when reports are prepared.

The following analogy shows an example of the Accounts receivable motion folio.

Example of the Accounts receivable movement page.

On each register line, you can review the information in the post-obit columns:

  • Line number
  • Accounting object: The number of the client invoice or vendor prepayment.
  • Transaction engagement: The engagement of the document that is shown in the Accounting object column.
  • Transaction clarification
  • Dead line: The engagement that the debt must be repaid by.
  • Accounting guild: The terms of payment.
  • (Debt intervals): There is a separate column for each debt period that you configured earlier (for instance, Debt >=0 <45, Debt >=45 <90, and Debt>=90 <360). Each columns shows the amount of bad debt for the corresponding debt period.
  • Amount/Exchange divergence: The exchange corporeality or charge per unit difference.
  • Acquisition price
  • Provision of pawn
  • Close appointment: The engagement of the write-off or payment transaction that is shown in the Bookkeeping object cavalcade.
  • Close reason: The description of the transaction for writing off or paying the debt.
  • Shut amount: The amount of the transaction for writing off or paying the debt.
  • (Remains intervals): There is a carve up column for each debt period that you configured earlier (for example, Remains >=0 <45, Remains >=45 <ninety, and Remains >=ninety <360). Each column shows the remaining amount of the outstanding accounts receivable debts after the debt movement for the respective debt flow.

Hopeless debt recognition and write-off

Recognize and write off hopeless debt

  1. Calculate and approve the tax annals periodical for the previous period.

  2. Become to Accounts receivable > Periodic tasks > Amortization > Accounts receivable amortization.

  3. In the Adding date field, select the date. That appointment will be used to select the calculation period.

  4. In the Model field, select the debts calculation model.

    The folio shows hopeless debts every bit of the selected reporting date:

    • The Customers tab shows the list of client invoices.
    • The Vendors tab shows the listing of prepayments to suppliers.
    • The Reserve field shows the amount of the formed bad debts reserve at the outset of the current menstruum that can exist used to write off hopeless debt.

  5. To review the original transactions for customers or vendors, select Transactions.

  6. To add together other customer or vendor transactions to the listing, on the Action Pane, select Select customer debts or Select vendor debts.

  7. Mark the debts that must be written off. The Total field in the Marked section at the bottom of the page shows the total amount of the marked lines.

    Marking transactions for write off.

  8. On the Action Pane, select Update. The marked transactions disappear. Additionally, in the Written off department at the bottom of the folio, the amounts increase to the value that the Full field in the Marked section had before yous selected Update. Transactions for customers and vendors, and transactions in the general ledger to write off each debt, are created. The engagement of the write-off operations corresponds to the date that y'all selected in the Calculation date field.

    Result of the update after transactions are marked for write off.

    Note

    The total amount of write-off transactions from the bad debts reserve is the bottom of the amount of the bad debt lines that yous marked and the corporeality of the bad debts reserve that was created at the end of the previous menstruum.

    If the amount of hopeless debt that must be written off exceeds the amount of the bad debts reserve, boosted transactions are generated for the remaining amount, to write the debt off to ledger account 91 non-operating expenses.

Abolish the write-off of hopeless debt

Follow these steps to cancel the write-off of hopeless debts.

  1. Become to Accounts receivable > Periodic tasks > Acquittal > Accounts receivable amortization cancellation.

  2. In the Adding date field, select the date. That date will be used to select the adding menstruum.

  3. In the Model field, select the debts adding model.

    The page shows written-off debts equally of the selected reporting appointment:

    • The Customers tab shows the listing of written-off customer invoices.
    • The Vendors tab shows the list of written-off prepayments to suppliers.
    • The Reserve field shows the corporeality of the formed bad debts reserve at the get-go of the current catamenia that can be used to write off hopeless debt.
    • The Written off field shows the corporeality of the written-off bad debts from the reserve for accounts receivable or to the revenues/expenses business relationship.

  4. To review the original transactions for customers or vendors, select Transactions.

  5. Marking the written-off debts that must be canceled. The Total field in the Marked section at the bottom of the page shows the total amount of the marked lines.

    Canceling the write off of debts.

  6. On the Activity Pane, select Update. The marked transactions disappear. In the Written off section at the lesser of the page, the amounts decrease to the value that the Total field in the Marked section had before you selected Update. Transactions that cancel the write-off of accounts receivable are then generated.