How to calculate the Doubtful Debts allowance. Relevant Provisions of the Law 1 3. This is usually expressed as a % of closing trade receivables and is usually estimated on the basis of past trend and future expectation about the receivables … An adjustment should be made in the tax computation for any such general provision in the Income Statement. Accounting Treatment of Doubtful Debt. Naturally, it is preferable to minimise the general bad debt provision. However a reasonable provision is created for these bad debts. Need help with the implementation of these amendments or to apply for a new directive as part of your corporate tax compliance? The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. TAX TREATMENT OF WHOLLY & PARTLY IRRECOVERABLE DEBTS AND DEBT RECOVERIES Public Ruling No. Irrecoverable Debts 4 6. Based on the accounting principle of Prudence, the business has to record the anticipated or expected loss in the books of account. Deducted from Accounts Receivables/Sundry Debtors under the head Current Assets: Let me help you understand the treatment better with the help of an example using … This Provision for bad and doubtful debts is generally provided at a certain percentage on Debtors, based on past experience. Save my name, email, and website in this browser for the next time I comment. On the other hand, due to bad debt expense, the total amount of trade receivable is reduced as well. There are two ways of doing this. you can either specifically write it off in the P& L as Bad Debt w/off or else you can reverse the sale invoice inc VAT if applicable, by way of issuing an … Posted by Alamgir | June 22, 2020 | Financial Accounting | 2 |. The corresponding entry will be affecting trade receivable by crediting it. Looking forward to hearing from you. Example. Assume that on 31.12.2017 Mr. David’s trade debtors stood at $432,000 only. INCREASE IN PROVISION FOR DOUBTFUL DEBTS: Assuming earlier in Quarter 1, we have created a provision for doubtful debts of $100,000. Treatment of provision for doubtful debts. A list of specific bad / doubtful debts is not necessarliy required to succesfully claim bad debt provisions as being specific. In determining the percentage, SARS will consider the following: Take note: From the effective date, taxpayers will no longer be entitled to apply any directives acquired from SARS in this regard. While the certainty in relation to doubtful debts is welcomed as taxpayers can more objectively predict their doubtful debt provisions, a key issue has nevertheless always been what in fact constitutes a “bad debt” for tax purposes. The This is a normal part of any business activity. Therefore, the same may be considered to be operating for the purpose of computing the operating margin of tested party … General provision for doubtful debts is still not tax-deductible. When the debt becomes doubtful, the lender is entitled to deduct an allowance. Differences among the different form of Businesses, IAS 8: Accounting policies, changes in accounting estimates and errors, IAS 8: Accounting policies, changes in accounting estimates and errors - Accounting Ustad. 4/2019 Date of Publication: 24 September 2019 CONTENTS PAGE 1. This creates a temporary difference between accounting and tax profits. Section 36(1)(vii) of the Income-tax Act, 1961 deals with the allowability of bad debts and section 36(1)(viia) deals with the allowability of provision for bad and doubtful debts. Provision for Bad and Doubtful Debts. If the debt ultimately becomes bad, the lender is entitled to deduct the amount that became bad. For years of assessment that commenced before 1 January 2019, the allowance for doubtful debt was essentially 25% of the amount of debts considered to be doubtful based on either a detailed list of potential doubtful debts or a general formula essentially based on historic data with regards to irrecoverable debts for the specific taxpayer. 3 Section 81(2)(i) TCA 1997 deals with allowances for bad or doubtful debts. Bad debts are being incurred or provision for the same is made by all companies after a certain period of time has elapsed. First of all, upon perusal of financial statements we find that the assessee has claimed the said expenditure of Rs. creation of provision for the first time , writing off the bad debt against provision in next year and creating a new provision … Your email address will not be published. While those Debtors about whom the business is sure that they will not pay their remaining dues are called Bad debts. Unfortunately the Act does not specifically define a “bad debt” and one must therefore consider the approach of fiscal interpretation of … Posted 15 April 2016 under Tax Q&A. He still wants to maintain a provision for bad debts … The business makes an estimate based on the previous trends about trade receivables, about whom the business is in doubt whether they will clear their dues or not, referring to such sort of trade receivables as doubtful debts. - Age analysis of the debt used. All taxpayers will be required to apply the amended provisions or apply for a new directive. For companies that opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts will be deductible for tax purposes. on the credit side of the profit and loss account. CONTACT US, For more on how the 2018 tax amendments will affect you, follow us on social media  ï…´ ï‚Œ,  [email protected] ï‚˜ (0)11 759 4252 4th Floor, The Firs, Cnr Biermann & Cradock Avenue, Rosebank, Johannesburg 2196, mergers and acquisitions,mergers & acquisitions, corporate tax consultants, tax dispute resolution, 40% of the impairment allowance loss based on  lifetime expected credit loss (excluding lease receivables). Thanks. Sisco says: 15 April 2016 at 10:32. This is because it is quite normal that customers for certain reasons fail to clear their dues. Recoverability of some receivables may be doubtful although not definitely irrecoverable. a bad debt deduction is not allowable under paragraph 63(1)(a) unless the debt has been previously included in assessable income. Designed by Elegant Themes | Powered by WordPress. 40% of debt 120 days or more in arrears; and. On the other hand, in the following year, the business would calculate whether there has been an increase compared to the previous year or business experienced a reduction in the value of doubtful debts; if there is an increase in the provision, then the business would treat it as an expense; while a reduction in the allowance will be considered as an income in the Income statement. The accounting treatment can be broadly divided into three stages . The deductions are as follows: i) 40 per cent of the face value of doubtful debts that are, at least 120 days past due date be allowed as a deduction, and While the rate of allowance was not defined in Section 11(j), based on SARS practice, 25% of the provision for bad debts was granted as an allowance. In 2014 income tax return the taxpayer claimed a doubtful debt allowance of R15,000. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. Business cannot assume that it will receive all amounts due from its customers. In case it is shown in the trial balance it will be recorded in ONE place only i.e. Although the word ‘provision’ is sometimes used in this context, strictly speaking these are adjustments of the carrying amount of an asset (debtors/amounts receivable) rather than recognition of a liability. Accounting Treatment: As per accounting, Bad debts are treated as an expense in the Income statement; while provision for doubtful debts needs to be recorded as an expense in the Income statement in the first year of trading. Tax treatment of doubtful debts to be clarified by way of statutory amendments In 2015, various discretionary powers afforded to the Commissioner of SARS in the context of assessment provisions contained in the Income Tax Act, No 58 of 1962 (Act) were removed in order to formalise the move towards income tax self-assessment in South Africa. 25% of the impairment loss allowance (excluding lease receivables). If provision for doubtful debts balance in 2015 was R120,000 (2014: R60,000) relating to a specific debtor. Circumstances Where Irrecoverable Debts Are … There has been a significant change from previous wording, with the old section 11(j) being repealed and replaced by an entirely new section. IFRS9 takes a different approach to impairment losses (also referred to as credit losses). Recovery of bad debt subsequently taxed as deemed income[Sec 41(4)]- - If a deduction has been allowed in respect of a bad debt under section 36(1)(vii), and subsequently the same is recovered in part or full then the amount so recovered is taxable as deemed income under the business income head. Treatment of provision for doubtful debts/bad debts written off. Take data from article provisions for bad debts example. It is identical to the allowance for doubtful accounts. It is not known by many that provision for doubtful debts can appear in the trial balance of a company. As per accounting, Bad debts are treated as an expense in the Income statement; while provision for doubtful debts needs to be recorded as an expense in the Income statement in the first year of trading. In its current form, and based on practice allowed by SARS, a taxpayer could claim a 25% allowance on its doubtful debt provision, but as the There are following two types of provision for doubtful debts or allowance for bad debts: (1) General Provision for Doubtful Debts: The term “general” is used when there is no clear evidence that which trade receivable will not clear his debt. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. As on 31.12.2012 Bad Debts written off is 3,000 & Sundry Debtors are 1,25,000; What is the difference between the adjusted and unadjusted Trial balance? Such other considerations as the Commissioner may deem relevant. Thus, the corresponding effect is on the trade receivable account by crediting it with the same amount of Bad debt expense. In case there is a reduction in the provision for doubtful debts, comparing to last year, then it will be treated as an Income, while a corresponding entry will reduce the provision for doubtful debt account by debiting it. Balance in Provision for doubtful debts u/s 36(1)(viia) 190. Provision for doubtful debts is considered as an expense in case there has been an increase in it, comparing to last year. No other assessee is allowed to claim the deduction on the provision of bad debts. Effective for years of assessment commencing on/after 1 January 2019, taxpayers will need to amend the manner in which they determine the doubtful debt allowance as per section 11(j) of the Income Tax Act 58 (1962). Contention of the Respondent Revenue: It was contended that deduction could be allowed against provisions for advances. Definitely, what a magnificent site and revealing posts, I definitely will bookmark your blog.Have an awsome day! For the bad debt claim to succeed, you either have to declare it w/off and account for it later if it does get paid. Interpretation 1 4. A general provision made in respect of doubtful debts (for example, based on a percentage of total sales or of all trade debts) is not allowable for tax purposes, even if there is a legal requirement or an accounting convention for the particular trade or industry to make such a provision. In terms of the previous provisions, a taxpayer was entitled to claim an allowance in respect of so much of any debt due to the taxpayer as SARS considers to be doubtful. A graphical method for determining Break-even. The Income Tax Act (‘the ITA’) makes provision for a range of treatments as the prospects of recoverability deteriorate. Tax treatment of doubtful debts not in terms of IFRS 9 1. taxpayers not applying IFRS 9 for financial reporting purposes. According to section 36(1)(vii), bad debts written off are admissible deduction subject to the conditions prescribed under section … Tony H. The following journal entry is made to records a reduction in provisions for bad or doubtful debts: Dr: Provision for bad debts account Cr. Therefore the business has to be mentally ready for this. The assessee had actually written off the said amount in the books of accounts under the head ‘Provision for doubtful advances’ and therefore the same are allowable u/s 37 / 28 (i) of the Income Tax Act. 3.3.1 General provision for doubtful debts A. The amendments as introduced by the 2018 Taxation Laws Amendment Bill published on 25 October 2018, discerns between debts accounted for in terms of the provisions of International Financial Reporting Standards (“IFRS”) 9 Financial Instruments and those debts that are not accounted for in terms of IFRS 9. Such receivables are known as doubtful debts. A taxpayer who is not a money lender and returns income on the basis of cash receipts will not be entitled to a deduction for bad debts because the debts have not been brought to account by the taxpayer as assessable income. The new standard will change the accounting for bad debts on financial assets (including trade debtors) from an “incurred loss” basis to “expected loss” basis. Bad debt is treated as an expense, hence debited in the Income statement. The changes to Section 11(j), as originally proposed in the 2018 … The history of a debt owed to that taxpayer, including the number of repayments not met, and the duration of the debt; Steps taken to enforce repayment of the debt; The likelihood of the debt being recovered; Any security available in respect of that debt; The criteria applied by the taxpayer in classifying debt as bad; and. Your email address will not be published. It was SARS’ practice to grant an allowance of 25% of doubtful debts. In accounting records, provision for doubtful debts is recognized as expense way before the actual write off while tax laws allows claim of bad debt expense only when non-recoverability of debt is confirmed and debts are written off. Treatment of Provision for Doubtful Debts in Balance Sheet. This will accelerate the recognition of imp… : Profit & Loss Account With the amount of provision. We are providing assistance in research-based content writing, related to Accounting, Finance, Marketing, Human Resource, Business Strategies, and Strategic management. 530.47 Lacs under the head ‘Provision for doubtful advances’ and this provisions has been reduced from the figures of Advances recoverable in cash or in kind or for value to be received under the head Other current Assets, Loans & … Say,at end of Quarter 2, we have reviewed our trade debtors and wanting to increase the provision by an additional amount $50,000. A deduction for a bad or doubtful debt is to be made in arriving at the profits of the year in which the debt becomes bad or doubtful. It has a credit balance as it is an accounts receivables contra account. Bad Debts and Provision for Bad and Doubtful Debts. Objective 1 2. New doubtful debts regime The provisions of section 11(j) of the Income Tax Act (“the Act”) allow for taxpayers to claim tax relief in respect of doubtful debts. Taxpayers that apply the provisions of IFRS 9 to account for the relevant debt should determine the allowance for doubtful debts as the sum of: Taxpayers that do not apply the provisions of IFRS 9 to account for the relevant debt should determine the allowance for doubtful debts as the sum of: The amendments further allow a taxpayer to apply to SARS for a directive to increase the percentage of the allowance to a percentage not exceeding 85%. Doubtful Debts 9 7. Financial Statement: Calculation: Treatment: Balance Sheet: It is calculated on the following amount: Sundry Debtors – Bad Debts. Required fields are marked *. As per section 36(1)(viia) of the Income Tax Act, 1961 only banks and financial institutions are allowed deduction in respect of the provisions made for bad and doubtful debts. 3 General Provision For Bad Debts General provision for bad debts which is based on a percentage of total sales or outstanding debts, is not tax deductible even though the taxpayer may be required to do so under law and accounting convention. Taxpayers that apply the provisions of IFRS 9 to account for the relevant debt should determine the allowance for doubtful debts as the sum of: 40% of the impairment allowance loss based on lifetime expected credit loss (excluding lease receivables) and accounting bad debts; and 25% of the impairment loss allowance (excluding lease … The Inland Revenue will accept bad debts as specific where statistically it can be proven as reasonable. - … Introduction 4 5. Therefore allowances for bad and doubtful debts are not provisions and are not covered by … Provision for Bad/Doubtful Debt is not a tax deductible expense. 25% of debt 60 days or more in arrears but less than 120 days. Prudence requires that an allowance be created to recognize the potential loss arising from the possibility of incurring bad debts. Unlike actual bad debt the doubtful debts are not immediately write off. Covered persons such as banks and insurers will continue to apply the provisions of section 11(jA) of the Income Tax Act. Provision / Allowance for doubtful debts. Thanks for your appreciation.