Write off non-recoverable debts

Direct Write-Off Method

The seller can charge the amount of an invoice to the bad debt expense account when it is confirmed that the invoice is not paid. In the books of account, a Bad Debt Expense account is debited and the Accounts Receivable account is credited. Therefore, the expense is directly linked to a specific invoice. This entry does not result in reduction of sales, but rather an increase in expenses.

This method may not be the most appropriate method to recognize a bad debt expense, as the expense is recognized several months later than the revenue associated with the initial sale, thereby separating elements of the same transaction into different time periods.

Allowance-method

When sales transactions are posted, a related amount of bad debt expenses is also posted on the assumption that approximate amount of bad debt can be determined based on historical calculations. In the books of account, a Bad Debt Expense account is debited and the Allowance for Doubtful Accounts is credited. However, the actual elimination of unpaid Accounts Receivable is calculated by posting the transaction where the Allowance for Doubtful Invoices account is debited and the Accounts Receivable account is credited.

The bad debt expenses can be estimated based on:

• Calculating and applying an overall bad debt percentage to all credit sales;
• Calculating and applying a large percentage to aging buckets (in which accounts receivable are reported) in the accounts receivable aging report;
• Calculating based on a risk analysis of each customer.

This is the recommended method to recognize a bad debt expense, as a portion of all sales is reserved as soon as revenue is recognized. This method is used to display the revenues and related expenses in the same time period, so that the impact of all sales on profits within the same accounting period can be viewed. In the income statement, the Bad Debt Expense is displayed as a line item in the Operating Expenses section.

Data Set-up

An entry is created in the Accounts by Financial BP Group (tfacr0110m100) session to define the account to be debited, for Account Receivable, which cannot be collected and must be set as bad debts (written off). In the Ledger Account field, the General Ledger account that must be used to debit, in case, Accounts Receivables are written off is specified.

If the Direct Write Off method is used, the Bad Debt Expense (account of type Expense) must be specified. If the Allowance Method is used, the Allowance for Doubtful Invoices (account of type contra Asset account) must be setup.

Process

You can access the Write Off Bad Debts (tfacr2255m000) session to view the open Account Receivable entries that are to be written off. This session enables you to handle writing off bad debts and subsequently making the necessary General Ledger postings. This can be performed if the amount to be written off is less than, or equal to the amount specified in the Maximum Amount to be Written Off field. The user can specify this value in the User Tolerances for Write-Offs (tfacr0118m000) session. If the amount to be written off is greater than the maximum amount to be written off and:

• the Approve Write-Off Bad Debts check box is selected in the ACR Parameters (tfacr0100s000) session, the invoice must first be submitted and approved before written off.
• the Approve Write-Off Bad Debts check box is cleared in the the ACR Parameters (tfacr0100s000) session, the amount cannot be written off.

An invoice:

can be submitted for approval using the Submit for Write-Off Approval option in the Collections by Invoice-to Business Partner (tfacr3607m000) session.

with Write-Off Status set to Submitted can be approved using the Approve for Write-Off option in the Invoice-to Business Partner Open Entries (tfacr2520m000) session.

with Write-Off Status set to Approved can be unapproved using the Unapprove for Write-Off option in the Invoice-to Business Partner Open Entries (tfacr2520m000) session.

You can use the Write Off option from the Action menu in the Write Off Bad Debts (tfacr2255m000) session to write off the invoices and to create the journals.