Probably, every economic entity in its activity faced such a problem as writing off receivables. Any action of the organization should be displayed in the balance sheet and have good reason for this, documented.
First of all, it is worth determining what is receivables. It can be called exactly the amount of debt that the economic entity of our organization must return, that is, it is an obligation of one legal entity to another. If the timely fulfillment of these obligations is not carried out, the lender takes specific measures. As a rule, it simply files a lawsuit in court.
A special group should include cancellation of bad receivables. Bad debts mean those obligations that cannot be covered by the reserve fund of the enterprise and the return of which is considered impossible due to the complete insolvency of the borrower.
Accounts receivable should only be written off after a certain time has passed, called the limitation period, which is established in court. In most cases, the court designates a period of three years from the day following the date specified in the contract between the contractors. According to the rules, the lender applies to the borrower with claims for repayment of the debt. Then the obligation must be repaid after a maximum of seven business days.
Write-off of receivables: postings
In the financial statements, the specialist transfers the bad debts to the collection to the item of non-operating expenses of the enterprise. It is worth remembering that the correct cancellation is carried out only in the period when the limitation period has expired. If the accounting department of the enterprise reflected this posting in the report of the next period, then it is considered invalid. If errors are discovered by state authorities, enterprises will be forced to prove their own innocence in court. In this situation, it is enough for the economic entity to provide the tax service with an updated declaration on the basis of which the corresponding amendments will be introduced. In turn, an employee of the tax inspectorate has the right to carry out a desk audit, that is, clarifying the veracity of the documents provided. If errors or inconsistencies are found, the company is notified within three days. Errors must be corrected within five business days.
So, bad debt is reflected in the financial statements in the form of a double entry on the accounts “Other income and expenses” (for debit) and “Settlements with buyers and customers” (for credit). Separate posting is used to express loss due to unfulfilled obligations on account 007, called “Write-off of losses into debt of insolvent creditors”.
Write-off of receivables relates to non-operating expenses, subject to the availability of a reserve fund. But there are situations when the organization considers it inappropriate to create such a fund. In this case, debts directly affect the financial result. If the amount of the debt exceeds the amount of the trust fund intended to cover unforeseen expenses, the uncovered part is also reflected in the financial result as of the reporting date.
In some situations, the accountant gains the right to write off the debt of the debtor earlier than the deadline set by the court. Often this happens when the debtor’s company is liquidated on the basis of a court opinion. Moreover, the creditor is obliged for five years to keep in its archive documents that are the basis for writing off the debt and confirming the fact that it is recognized as hopeless to recover. This need is explained by the fact that the tax authority can verify the veracity of the transaction data reflected in the balance sheet.
In addition, immediately before the cancellation, the lender is obliged to take an inventory of the debt, since it is accurately displayed in the documents. For this, the head of the enterprise signs the relevant order and forms a commission. Only after the end of these events is it possible to display bad debts in the balance sheet.