Bad accounts receivable: how to confirm, where to show

Fulfillment of contractual obligations does not always require 100% prepayment before delivery of goods or services. Typically, final payment occurs after the supplier has fulfilled its contractual obligations. Arising accounts receivable are a common occurrence in economic and commercial life. At the same time, control of the amount and timing of debt repayment is very important for the company. If for some reason it is impossible to collect the debt, the “debt” is considered uncollectible and must be written off.

How to write off unrecoverable (bad) receivables in accounting?

What is a BDZ and what features does it have?

Every debt that appears to the company's counterparties selling goods during the period of providing services or performing their functions, which is not repaid in a timely manner and is not secured in any way, is initially classified as doubtful debts. Based on Article 266 of the Tax Code of Russia, a debt is recognized as uncollectible when one or a number of conditions are met:

• 3 years have passed since the claim was filed (that is, the statute of limitations has passed).
• Termination of a debt obligation due to the impossibility of fulfilling it. The reason for this may be the actions of creditors or the emergence of circumstances when neither party is responsible for what happened.
• The legal entity was liquidated or a person died.
• The enforcement proceedings were completed by the bailiff due to the impossibility of establishing the debtor's address, or there was simply nothing to collect.

A bad debt arising as a result of the debtor's insolvency is subject to write-off, but cannot be canceled for another five years, since there is a possibility that the financial condition will improve.

Characteristics of Bad Debt

The main condition for establishing financial circumstances as unfeasible is the termination of the limitation period.

The relevance of obligations ceases in accordance with the norms of the Civil Code of the Russian Federation:

• according to government regulations;
• due to the inability to fulfill financial obligations;
• due to the liquidation of the debtor, and there is no legal successor.

It is necessary for the FSSP employee to confirm the impossibility of fulfilling financial obligations:

• It was not possible to find out where the debtor is currently located;
• it was not possible to find out information about the debtor’s income or whether he has property;
• it turned out that the debtor does not have property and assets that could be recovered to pay off the arrears.

Current data on enforcement proceedings can be obtained on the FSSP website. You will need to enter your full name, year of birth, region of residence, after which information about non-payments of a legal entity or individual will be displayed.

How does accounting, reservation and inventory of BDZ occur?

As for tax accounting, debt is recognized as uncollectible according to the conditions stated above. Also, such a debt should not be supported by an early agreement without collateral or guarantors. Based on Article 265 of the law, such debt is included among losses.

The company's statutory policy must contain information about the development of special reserves aimed at writing off bad debts by the organization's finances. Such funds are considered reserves for doubtful debts. A certain portion of BDZ funds in excess of the available reserve may be included in losses. This can also include all BDZ funds if the reserve was not originally intended.

Before developing the BDZ reserve, it is necessary to carry out an inventory of receivables, based on the deadline for paying taxes. Taking into account the period of occurrence of doubtful debts, the total funds or a certain share are entered into the reserve:

• For 90 days all funds are assumed.
• For 45-90 days, half of the total amount is allocated.
• Until 45 days, the amount is not indicated in the reserve.

The tax accounting of the BDZ is displayed within the company’s profit.

How is recognition of BDZ carried out for collection?

Since bad receivables are an element of taxation, the grounds for their recognition are defined in the Tax Code. Other circumstances are not provided for, so that the debt cannot meet the requirements of uncollectible in the event of:

• The decision to write off the debt was made by the company itself.
• Appearances in connection with the debt of a legal entity at the stage of bankruptcy.
• Established by the guarantee agreement.
• Arose in connection with non-payment by a legal entity excluded from the Unified State Register of Legal Entities based on a decision of the tax authority.

It is possible to recover the BDZ from an individual who previously conducted business activities. Termination of an individual entrepreneur does not mean a lack of responsibility for paying bills, including receivables existing to ex-contractors.

Case No. 1: “An individual entrepreneur is in debt”

Everyone knows that if an organization ceases to exist, then it will no longer be possible to collect the debt from it. To what extent does this rule apply to individual entrepreneurs? Firstly, an individual entrepreneur is still a private person, i.e. an individual citizen who is subject to the requirements of not only the Tax Code of the Russian Federation, but also the Civil Code of the Russian Federation, and he has his own levers of influence on citizens. Let’s imagine a situation where you shipped goods without payment to individual entrepreneur S.S. Ivanov. for three months, and then you find out that in the fourth month he lost this status due to his own initiative. Moreover, you have no information that he decided to lose his status due to his bankruptcy. In this case, Ivanov S.S. should be considered by you as an ordinary citizen who owes your organization payment of bills. It is possible and necessary to collect the debt from him - we draw this conclusion based on Article 24 of the Civil Code of the Russian Federation, because he is financially liable to the creditor (i.e., to your company). It is understandable that he may have a desire to “hide somewhere,” because it is not for nothing that he deliberately ceased to be an individual entrepreneur. You can go to court with a claim in this case, and it is more likely to be satisfied. It is important to note here that Ivanov should not have evidence that he has become bankrupt, otherwise the receivables will remain in a hopeless state. The same rule applies to bankruptcy of individuals, which a citizen can also confirm.

How is BDZ written off?

The Tax Code of the Russian Federation stipulates the procedure for recognizing a debt as bad, writing off bad receivables, methods and stages of this process, along with a package of documentation that must be completed when carrying out the procedure. As for the timing of the operation, they are also prescribed, but are advisory in nature.

To avoid any troubles, the easiest way is to write off the debt in the form of losses at the moment when there is a legal basis for this. This may be the end of a specific tax period, without postponing the procedure to a later time. However, it is not always possible to timely obtain supporting grounds and documents that ensure recognition of a BDZ. In this situation, it will be necessary to provide the tax authorities with an accurate income tax return, including information for the past period of time when the debt write-off operation was required.

How to write off a bad debt? There are a number of techniques for this:

• Subtraction of funds from the reserve for doubtful profits.
• Classifying the total amount as a loss.

The use of a certain method must be specified in the company’s tax accounting policy, since not all enterprises are able to provide themselves with a special reserve for writing off debts.

There is an exception that in any situation prohibits the write-off of BDZ in the form of non-operating funds in order to reduce the tax base when it comes to income tax. While the company is on a reduced tax basis, no debt can be included in the number of losses.

Recognition of the fact that the debt is subject to write-off and the write-off process itself is carried out by order or instruction of the founders of the company. Before issuing an order, the accounting department must send a memo to the management of the organization, attaching a written justification for the procedure.

Goods, work or services not paid for by the buyer

The seller will have to write off the entire debt amount along with the amount of value added tax. It is impossible to claim VAT for deduction in such a situation. We reflect transactions in accounting:

What documents are needed for BDZ

In order for a company to have the right to reduce its tax base in the event of taxation of profits for losses under the BDZ, the presence of such debt must be confirmed by special documentation. This often includes primary accounting documentation:

• Agreements with payment schedules.
• Documents on acceptance and transfer.
• Product invoices.
• Acts of acceptance of completed procedures.

Other documentation that is not included in the primary documentation, including an order to write off expired debt, a conclusion on debt inventory, and an accounting certificate, cannot confirm the legality of writing off BDZ in the form of losses.

Case No. 5: “Agreement on the assignment of the right of claim”

This case is somewhat similar to when one organization is absorbed by another. In fact, it may happen that an enterprise can buy out a company with debts. It is clear that she is not interested in paying off other people’s debts, however, she will still have to do this. According to the letter of the Ministry of Finance dated October 20, 2015 No. 03-03-06/1/60050, the purchasing company cannot recognize this debt as bad in this case, and it is obliged to pay. Moreover, until the debt is repaid, she does not have the right to resell this company to someone else.

The procedure for writing off BDZ

There is also a special procedure for writing off accounts receivable. Before the start of the write-off procedure, the debt must certainly be inventoried based on the reporting tax period of time. Next, a reserve for write-off is created, and its volume should not be lower than 10% of the profit in a given time period. The developed reserve can only be used as part of the write-off of BDZ.

The created reserve for the current period of time is compared with the financial assets of the previous reserve. In a situation where the volume of the newly created reserve is lower, the difference is applied to losses for the previous segment, but if it is higher, the difference is taken into account in the current segment.

It is also prohibited to classify all BDZ funds as non-operating expenses if the company has special reserved funds for such situations. Then the write-off should be carried out only through the reserved amount.

Reasons for paying attention to bad and doubtful debts

Every accountant should keep bad and doubtful debts under close control. The reasons for this attention are:

1. The formed debt raises doubts about the possibility of collection and falls into the category of hopeless, forming an increased receivable in the internal currency of the enterprise and leading to the unreliable formation of financial statements;
2. Accounts receivable that are doubtful for collection lead to the formation of reserves for doubtful debts within the company's account. For accounting purposes, the creation of such reserves is the responsibility of the enterprise. For tax services, the taxpayer has the right to form such reserves;
3. Uncollectible receivables must be written off in both accounting and tax reporting.

When is debt written off?

Although the deadlines for writing off bad debt on accounts receivable are not clearly defined in the legislation of our country, the tax authorities provide their recommendations. Thus, it is better for companies to recognize debts in their expenses for the tax period when there are grounds for this. It is important to observe this circumstance in order to avoid tax disputes.

For example, the BDZ company’s statute of limitations expired in November 2015. In this situation, the accountant must reduce the tax base in the new year, 2021. If there is a delay, the tax authorities may begin to present their claims against the enterprise.

How postings are made

To analyze the accounting entries regarding the write-off of BDZ, you can consider another example. The company entered into a purchase and sale agreement for its goods with a client in the amount of 30 thousand rubles. The customer received the product but did not pay for it. The agreement was drawn up without the presence of collateral or a guarantor. That is, a doubtful debt appeared, the write-off of which should have been carried out using the developed reserve. When 3 years passed, that is, the statute of limitations expired, the doubtful debt was transferred to the category of BDZ.

Case No. 6: “The bank turned out to be the debtor”

Some of our colleagues encountered a problem when the debtor turned out to be a bankrupt or deprived of its license. As you know, the process of its liquidation is associated with bankruptcy proceedings, which can last several years. Based on the letter of the Ministry of Finance dated March 4, 2013 No. 03-03-06/1/6313; “An organization cannot write off the debt of a bankrupt bank until bankruptcy proceedings against the bank are completed.” All bank debts cannot be recognized as bad debts until bankruptcy proceedings are completed. Who knows, maybe after a year or two, funds from the sale of bank assets will arrive in your current account, which will be sold at auction. So, take your time.

Results

A receivable debt based on the listed advances, for which the statute of limitations has expired, is transferred to the category of bad debt if all measures to collect it have not brought the necessary result. Sending claims to debtors is not always a sufficient measure to achieve the required result - receiving funds.

If there is a write-off of debt for which a reserve for doubtful debts has not been developed, the financial results for taxation are increased by the total amount of the debt written off. That is, the financial result is reduced only by the amount of the BDZ, regardless of the presence of this loss reserve.

Also, if a receivable debt is recognized as bad, the right to a VAT tax credit is lost. To do this, it is important to adjust the amount of the tax credit created for the period of preliminary payment of funds for undelivered services or goods.

Case No. 4: “Guarantor”

If, before shipping goods or providing services on a large scale, you are worried about how conscientiously the counterparty will pay you, enlist the support of his guarantor. Most likely, he (the counterparty) will resist this in every possible way: “San Sanych, what are you talking about! We worked well as before! What other guarantors? Don’t you trust me?” “I trust you, but you never know what can happen. This is still a business and there is nothing personal here,” this is roughly how you need to answer him. It is the presence of a guarantor that will allow the company to collect the debt if for some reason it goes bankrupt or is reorganized. True, he may have another problem - who wants to become a guarantor? In practice, this may be its own subsidiary or related company.