Bad Debt Provisions and Bad Debt Write-Offs

Article ID: 2024672         Last updated: 20 August 2019

 

This information is of a generic nature. For specific advice regarding your particular circumstances please seek assistance from your accountant or HMRC as appropriate.

If a customer has not been able to pay amounts due to you for goods or services provided within the terms of sales agreed, and you suspect or have evidence that you will not be receiving the outstanding monies owed to you (e.g. if you have been made aware that the customer is being liquidated or undergoing bankruptcy or similar processes) then you can raise a credit against the customer’s account and analyse this to a Provision for Bad Debts liability account on your balance sheet to be written off at a later stage.

Once the debt is 6 months old (from payment due date) then you can write off the debt from the Provision for Bad & Doubtful Debts liability account to your Bad Debt Write-Off Expense account on your profit and loss accounts. You may be able to claim back VAT provided certain criteria are met as summarised further below.

Note!  If the debt is already 6 months old (from payment due date) then you do not need to provision for it, you should write it off straight away by raising a sales credit.

For help on how to create accounts on AccountEdge please click here.

Claiming VAT on Bad debts

(https://www.gov.uk/vat-returns/fill-in-your-return)

You can reclaim the VAT you’ve paid HMRC but not received from a customer if it’s a ‘bad debt’ (one you’ve written off). To qualify for the relief:

  • the debt must be between 6 months and 4 years and 6 months old
  • you mustn’t have sold the debt on
  • you mustn’t have charged more than the normal price for the item

You should reclaim them via your VAT Return (add them to your Box 4 figure) and keep records about the debt for up to 4 years.

If the debt is paid, you must pay the relief back via your VAT Return by adding the amount to your ‘Box 1’ figure’. You can do this by raising a VAT Inclusive Sale on AccountEdge and analysing it against the Bad Debt Write Off Expense account (instead of an income account) and using the standard VAT code.

 

Example 1 - Illustrates provisioning for bad and doubtful debts before writing them off

Step 1:  Record a Credit Memo

  1. Go to the Sales Command Centre and choose Enter Sales.
  2. Select the customer.
  3. In the top left corner of the window, select CREDIT MEMO.
  4. At the bottom of the window, click the Layout button and choose Miscellaneous.
  5. Type in a description to state the reason for the entry (maybe include reference to the original invoice etc.).
  6. Allocate the sale to the Provision for Bad Debts liability account.
  7. Use the N-T VAT code on this transaction if you account for VAT on a standard accrual basis or if you are not VAT registered.  If you account for VAT on a cash basis, then you should enter the appropriate VAT code from the original invoice.

Your transaction should look similar to the following example:

Credit Memo 1

Step 2:  Apply the Credit to the outstanding sales

  1. From the Sales Command Centre choose Sales Register.
  2. Select Returns & Credits tab.
  3. Locate and highlight (click once) the Credit in the list and click the Apply to Sale button.
  4. The Settle Returns & Credits window will appear.
  5. Applying a credit to invoices is done in the same manner as applying a customer payment.
  6. In the Amount Applied column, apply the Credit amount to the required outstanding invoice(s) and click Record.
  7. The invoice and credit entry have now been settled against each other, the balance of the customer has been reduced (and therefore the debtors total).

Step 3:  Record a Journal entry to write off the bad debt once the debt is older than 6 months

  1. Go to the Accounts Command Centre and choose Record Journal Entry.
  2. If you account for VAT on a standard accrual basis, and you are entitled to claim this then tick the VAT-Inclusive option and use your Standard VAT Code against the Bad Debt Write Off Expense account. If you are not VAT registered, or use cash acounting for VAT, or are not eligible to claim VAT on this bad debt then use the N-T VAT Code.
  3. Debit the Bad Debt Write Off Expense account and make sure that the correct VAT Code is in use as stated above.
  4. Credit the Provision for Bad Debts liability account.
  5. The 'Display in VAT reports as' should be set to Purchase (Input) before recording the journal so that the VAT value being claimed is reported in Box 4 on the VAT Return.
  6. Click Record to save the journal.

VAT Journal 1

 

Example 2 - Illustrates writing off a bad debt without provisioning

Step 1:  Record a Credit Memo

  1. Go to the Sales Command Centre and choose Enter Sales.
  2. Select the customer.
  3. In the top left corner of the window, select CREDIT MEMO.
  4. Click the Layout button and choose the Miscellaneous.
  5. Type in a description to state the reason for the entry (maybe include reference to the original invoice etc.).
  6. Allocate the sale to the Bad Debts Write Off expense account.
  7. Use the N-T VAT code on this transaction if you account for VAT on a standard accrual basis or if you are not VAT registered.  If you account for VAT on a cash basis, then you should enter the appropriate VAT code from the original invoice. 

Your transaction should look similar to the following example:

Credit Memo 2

Step 2:  Apply the Credit to the outstanding sales

  1. From the Sales Command Centre choose Sales Register.
  2. Select Returns & Credits tab.
  3. Locate and highlight (click once) the Credit in the list and click the Apply to Sale button.
  4. The Settle Returns & Credit window will appear.
  5. Applying a credit to invoices is done in the same manner as applying a customer payment.
  6. In the Amount Applied column, apply the Credit amount to the required outstanding invoice(s) and click Record.
  7. The invoice and credit entry have now been settled against each other, the balance of the customer has been reduced (and therefore the debtors total).

Step 3:  Record a Journal entry to claim your VAT if eligible

  1. This applies only if accounting for VAT on a standard accrual basis and not for accounting VAT on a cash basis.
  2. Go to the Accounts Command Centre and choose Record Journal Entry.
  3. Debit the Bad Debt Write Off Expense account and use your Standard VAT Code.
  4. Credit the Bad Debt Write Off Expense account but use the N-T VAT Code on the credit line.
  5. The two entries above will result in reducing the Bad Debt Write Off Expense account by the VAT amount being claimed and adjusting this against your linked VAT Due liability account.
  6. The 'Display in VAT reports as'should be set to Purchase (Input) before recording the journal so that the VAT value being claimed is reported in Box 4 on the VAT Return.
  7. Click Record to save the journal.

VAT Journal 2

Note!  You should only use the above procedure to write off debts that you know you won't recover.

 

 

Disclaimer: This information is of a generic nature. For specific advice regarding your particular circumstances please seek assistance from your Accountant or HM Revenue & Customs as appropriate.