Provision for doubtful debts

When you just start a business there are a lot of tasks on your plate so your accounting can easily get put on the back burner. And as your company is growing, many issues involved in your finance happen. One of the most confused accounts that many normal accountants encountered and failed when realizing it: Provision for doubtful debts! In today’s article, follow S4B to track the questions related to this account!

The 1st question: The difference between doubtful debt and bad debt

According to Accountants’ Dictionary, “a bad debt is an account receivable which has been clearly identified as not being collectible”. In other words, that is a trade receivable which you are no longer able to collect because of a variety of reasons. For example, your debtor is dead, in the process of trial or escaping abroad. However, the problem we are focusing on is doubtful debt. “A doubtful debt is an account receivable that might become a bad debt at some point in the future” (Accountants’ Dictionary). When you sell a product in term of credit sales, you may not even be able to specifically identify which open invoice to a customer might be classified as doubtful debts. You must look at their credit term to decide whether give them the product or not. If the customer has good creditworthiness, a regular credit check will not be necessary.

The 2nd question: Why you have to provision for doubtful debt?

The provision for doubtful debts, which is also called the allowance for doubtful account, is the estimated amount of bad debt that can arise from trade receivable account. Once you realize that the debt is overdue or the debt is not due but the customer is unable to pay. In addition, if you are prudential enough to see the risk of that debt based on your historical experience, you can record an allowance account immediately which conform with Accounting Law.

The 3rd question: How to calculate doubtful debt provision?

Accountants should analyze receivables at the reporting date and sort them according to their aging structure, then apply certain percentages of provision to the individual aging groups under Circular 228/2009/TT – Ministry of Finance.
Time of overdue    Percentage (%)
6 months – 12 months    30
1 year – 2 years    50
2 years – 3 years    70
>3 years    100
However, in some cases, your corporate will base on the situation of your customers to determine the percentages applied for the debt’s value.

Later, when you identify a specific customer invoice that is not going to be paid or that customer claim that he/she is unable to pay for the debt, eliminate it against the provision for doubtful debts. In a situation that the value of debt exceeds the value of allowance account, you extract the Management Cost to write off the remained value of debt.

Of courses, there are many questions involved in allowance for doubtful account. So contact S4B now for solutions to your issues. With S4B, building trust across society is a way to fulfill our purpose.


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