Legal debtors

When a debtor enters litigation, a separate process starts. All items for the customer's account are transferred to a legal status within accounts receivable and a general ledger journal is effected between trade debtors and legal debtors.

A provision for doubtful accounts, or bad debt reserve, is created as a reduction in accounts receivable. When a customer’s debt is written off, the customer’s open items are cleared by the posting to the GL write-off account.

Both the allowance for doubtful accounts and bad debt reserve are created as a reduction in accounts receivable. The value a company anticipates as being uncollectible is known as the bad debt reserve.

Where a customer’s debt is written off, the open items are cleared by the posting to the GL write-off account. Any output VAT is normally recoverable. Whether it is recoverable can affect the GL updates.

United Kingdom specifics

VAT that is paid to HMRC, but not received from a customer, can be reclaimed by a vendor if it is a bad debt. A bad debt is one that has been written off. Use these guidelines to qualify for VAT relief:

  • The output VAT must have been paid previously to HMRC
  • The debt must be between 6 months old and 4 years and 6 months old
  • The debt must not have been sold on
  • The amount charged must not be more than the normal price for the item

The reclaim should be made using the VAT Return and a record of the debt should be maintained.