I've had conflicting advice about this, and I'm not sure what is the correct way.
At the end of the year I set up a provision for bad debt account of 5% of outstanding debtors.
Debtors Dr 10,000
Provision for Bad Debt Cr 500
Now in the following year one of those debtors is unable to pay their debts, so I have to write off their account. So lets say that CustA had a balance of Dr 500.
I've got one of two ways I can deal with this,
1)
CustA Cr 500
Provision for Bad Debt Dr 500
2)
CustA Cr 500
Bad Debt Dr 500
Which is the correct way of doing this.
Thanks
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Is there any situation where I would use option 1, e.g. if I had used specific provision?
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Provision for bad debt by its very name a general provision rather than a specific provisoin. Usually when you have a provision for bad debts you are providing for a proportion of your overall debtors not to pay eventually eg 5% based on past experience/expectations. In practice you dont usually see them.
A specific provision is a bad debt. This is when you know a particular individual debtor will not pay and thus should be written off.
No tax relielf given on general provision/provision for bad debt. Only debts specifically written off attract tax relief.
Provision for bad debt by its very name a general provision rather than a specific provisoin. Usually when you have a provision for bad debts you are providing for a proportion of your overall debtors not to pay eventually eg 5% based on past experience/expectations. In practice you dont usually see them.
A specific provision is a bad debt. This is when you know a particular individual debtor will not pay and thus should be written off.
No tax relielf given on general provision/provision for bad debt. Only debts specifically written off attract tax relief.
Hope this helps.
MarkS
A provision by its nature is something that is not definite. The specific provision therefore is for when you think the debtor is unlikely to pay. You still want to keep the debt on your sales ledger if there is a chance. When it is written off you would Cr Sales ledger and Dr Bad debt provision BS,
If you know for definite they are not going to pay (i.e. gone bust) then you would simply Cr Sales Ledger and Dr Bad Debts written off P&L
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As this topic is related to bad debt, thought I may as well quote HMRC rules on reclaiming vat from bad debt
"When you can reclaim VAT on bad debts You can reclaim VAT that you paid to HMRC and which you have not received from the customer. The conditions are that:
-the debt is more than six months old and less than three years and six months old -you have written off the debt in your VAT accounts and transferred it to a separate bad debt account -the debt has not been sold or handed to a factoring company -you did not charge more than the normal selling price for the items
How to claim bad debt relief / which box on vat return to enter figure of VAT element of bad debt -If you are entitled to claim bad debt relief, you add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.
To work out how much bad debt relief you can claim on a VAT inclusive balance, you need to apply the VAT fraction to the unpaid amount."
