Postings for writing off doubtful accounts receivable. Write-off of receivables and payables
No organization is insured against violations of contractual obligations by counterparties. Penalties provided for in contracts do not frighten unscrupulous partners and clients if they cannot or do not want to fulfill the terms of the agreement. And even the court does not always help restore justice and return the company’s debts, the amounts of which “hang” on the company’s balance sheet, unreasonably increasing its taxable profit. Postings to write off receivables can only be made if they are recognized as “bad”.
Which “receivable” is subject to write-off
The formation of non-recoverable “receivables” is a real “headache” for the accounting department and the owners of the enterprise. Not only did the organization receive less of its hard-earned money, it was also forced to include the amount of debt in the calculation of net profit and pay taxes based on inflated figures. Thus, defaulted debts distort the picture of the financial situation, and the creditor company is interested in writing them off as quickly as possible. But this can only be done after all legal ways to collect the debt from the debtor have been exhausted.
Debts are considered bad on the following grounds:
- The statute of limitations on the debt has expired. According to Art. 196 of the Civil Code of the Russian Federation, it is 3 years, provided that during this period the organization did not go to court and the debtor did not take any actions confirming the recognition of the debt. The recognition of claims by the debtor is evidenced by any, even penny, payments on existing debt, signed reconciliation reports, written responses, etc. From the moment any of these actions are committed, the limitation period begins to count anew.
- It is not possible to collect the debt for objective reasons: the debtor company no longer exists, has been declared bankrupt and its assets are not enough to pay creditors during the liquidation process. It is necessary to substantiate the unreality of collection with documents: an extract from the Unified State Register of Legal Entities on the closure of the debtor, a court decision on liquidation, a notice of the lack of company property to satisfy all requirements and other official papers.
Preparing for debt write-off
The procedure for writing off bad debts is regulated by the Regulations on Accounting (Appendix to Order of the Ministry of Finance No. 34n dated July 29, 1998). For each debt, postings are made separately: you cannot write off the entire “receivable” at once in one amount. All debtors and amounts due for collection from them must be systematically identified and entered into a special register based on the results of the inventory.
Inventory of debt is carried out by order of the head of the organization, as well as in cases provided for by law: the accounting law (No. 402-FZ) prescribes that it must be carried out before preparing annual reports. Enterprises that create reserves for doubtful debts (RSD) do an inventory quarterly, and based on data on accounts receivable at the end of the reporting period, they calculate the amount of reserves (Tax Code of the Russian Federation, Article 266, clause 4).
If the client did not go through the registers of doubtful payments, and then through the lists of clients with a delay of up to 90 days or more, postings to write off overdue receivables will certainly raise questions from the tax authorities. For them, transferring such a debt to losses will be considered unjustified, which threatens further additional taxes and punishment in the form of fines and penalties.
The inventory report and documents confirming the uncollectibility of the debt provide grounds for writing off “receivables” from the company’s balance sheet. The accounting department does this by written order of the manager. All papers related to the occurrence of debt, its maintenance and write-off are subject to storage for 5 years from the date of removal from the balance sheet.
Typical entries for writing off bad debts
What entries for writing off “receivables” the accounting department needs to make depends on whether the organization forms a RSD. If yes:
- Credit 62, 60, 70, 71, 73, 76 (settlements with counterparties) – Debit 63 (RSD).
- Debit 007 (loss on debt of insolvent debtors).
In the case where the organization has not reserved funds for this debt for the entire amount, coverage at the expense of the RSD is only possible in part. The balance will be included in non-operating expenses under Dt91.2. “Receivables” are also written off there if no reserve was created.
A few words about account 007. This is an off-balance sheet account that records bad debts with detailed analytics: who is the debtor, how much, when and on what basis it was written off. If there is a chance to one day return lost money (by a court decision, with an improvement in the client’s financial situation), account 007 makes it possible to do this: by posting Kt91.1 (non-operating income) - Dt51 (company current account), then by writing off the amount of the paid debt from 007 .
Write-off of accounts receivable and tax accounting
To simplify the work with “receivables” in tax and accounting, it is recommended to establish uniformity in the company’s accounting policies: if an organization creates reserves for doubtful debts for tax purposes, the same should be done in relation to accounting. In this case, the write-off of bad debts will occur according to the same principles: through the RSD, and in its absence - through non-operating expenses (Articles 265-266 of the Tax Code of the Russian Federation).
Attributing the debts of insolvent counterparties to the company's loss leads to a change in the income tax base and difficulties in calculating VAT.
For tax accounting of persistent defaulters with the creditor, it is important who the debtor is: a buyer or a supplier. The first option assumes that the write-off of debt for goods (services) sold is accompanied by value added tax, if it was not accrued at the time of shipment.
If the seller showed dishonesty by not delivering the paid goods, the buyer’s “receivables” may also become irrevocable. Here the problem with VAT is solved simply: the creditor does not have an obligation to pay it. But he cannot claim for deduction the tax included in the advance payment to the seller. Then the VAT, together with the rest of the debt, turns into bad debt.
The following question raises difficulties for accountants: if the debt is written off, is it necessary to charge VAT if the debt is repaid in the future? Since this tax has already been taken into account either at the time of shipment or when written off, there is no need to do this again. But the creditor has another obligation: to pay income tax, since the debt he receives becomes non-operating income.
Accounting for VAT when writing off a buyer's irrecoverable debt
In tax accounting, the write-off of accounts receivable is supplemented by VAT postings: Dt76 (deferred VAT calculations) – Kt68 (current VAT calculations). If there is a reserve for doubtful payments, all debts in it are attributed to non-operating expenses for which VAT is not paid until the end of the reporting period. At the end of the quarter, you need to compare the reserved amount with the amount of bad debt recorded in the inventory report. The difference in figures in favor of RSD means that not all payments not received from counterparties are non-refundable, and VAT must be paid on them. If defaulted debts deemed uncollectible exceed the reserve fund, the overpayment is deducted from the taxable amount based on the reconciliation report.
In the absence of reserves, this procedure will have to be carried out monthly, but if desired, the organization has the right not to write off overdue “receivables” until the limitation period for them has expired. However, when this happens, losses must be taken off the balance sheet urgently, in the same month, since they cannot be carried forward further.
As for the latest changes in the tax accounting of debt obligations, by letter of the Ministry of Finance No. 03-07-15/6333 dated March 4, 2014, penalties for late payments were removed from the taxation of pricing elements. This means that they can be used to write off accounts receivable in 2015 using accounting entries. The issue of recognizing the entire amount of “receivables” as tax-free is being discussed at the level of government experts, but so far the introduction of such a provision is considered premature and inappropriate.
There is also the problem of writing off bad debts for those enterprises that have switched from general to special tax regimes, if their “receivables” arose during the period of application of OSNO. The Tax Code does not cover such situations, and accountants have to turn to the inspectors of the Federal Tax Service for clarification.
06/05/2019 Attention! The document is out of date! New version of this document
Under OSN, any debt to your organization is considered bad, i.e. unrealistic for collection, and is written off in the reporting (tax) period in which any of the following events occurred (clause 2 of Article 266 of the Tax Code of the Russian Federation):
- the statute of limitations has expired. In general, it is 3 years from the day when you were supposed to repay the debt, but for some requirements the law sets special deadlines;
- the debtor organization has been liquidated;
- The debtor organization was excluded from the Unified State Register of Legal Entities on September 1, 2014 or later as an inactive legal entity (clause 2 of Article 64.2 of the Civil Code of the Russian Federation, clauses 1, 3 of Article 3 of Law No. 99-FZ, Letter of the Ministry of Finance dated January 23, 2015 No. 03- 01-10/1982);
- The bailiff issued a decision to terminate the enforcement proceedings and return the writ of execution to the recoverer due to the impossibility of collection.
It is impossible to recognize a debt as bad in the period when the Federal Tax Service excluded the debtor organization from the Unified State Register of Legal Entities due to the fact that it actually ceased its activities, if an entry about this was made in the Unified State Register of Legal Entities before 09/01/2014 (Letter of the Ministry of Finance dated 02/27/2013 N 03-03- 06/1/5556). Such a debt will become uncollectible only after the statute of limitations has expired.
In addition, the receivables of the counterparty, which can be offset against the repayment of counter-accounts payable to him, are not recognized as a bad debt (Letter of the Ministry of Finance dated October 4, 2011 N 03-03-06/1/620).
Write-off of bad debt is documented with the following documents:
- act of inventory of settlements (form N INV-17);
- by order of the manager.
Amount of bad debt written off, including VAT (Letter of the Ministry of Finance dated October 21, 2008 N 03-03-06/1/596):
- if the organization does not create a reserve for doubtful debts, it is included in non-operating expenses (clause 2, clause 2, article 265 of the Tax Code of the Russian Federation);
- if an organization creates a reserve for doubtful debts, it is written off against the reserve (even if the amount of this debt was not taken into account when calculating contributions to the reserve) (Letter of the Ministry of Finance dated July 17, 2012 N 03-03-06/2/78). That is, non-operating expenses include only that part of the amount of bad debt that exceeds the amount of the reserve created on the last day of the previous reporting (tax) period.
When writing off a bad debt in the form of an advance payment transferred to a supplier (contractor, performer), the VAT previously accepted for deduction must be restored and the entire amount of the debt, including VAT, must be written off as expenses (Letters of the Ministry of Finance dated January 23, 2015 N 03-07-11/ 69652, dated 04/11/2014 N 03-07-11/16527).
Under the simplified tax system, receivables recognized as uncollectible, i.e. unrealistic for collection, is not taken into account either in expenses or income. It does not matter whose debt is recognized as bad:
- buyer for payment for shipped goods (work, services) (clause 1 of Article 346.17 of the Tax Code of the Russian Federation, Letter of the Ministry of Finance dated July 22, 2013 N 03-11-11/28614);
- supplier for the shipment of goods (work, services) paid in advance (Letters of the Ministry of Finance dated March 30, 2012 N 03-11-06/2/49, dated December 12, 2008 N 03-11-04/2/195);
- borrower to repay the loan and pay interest.
More on the topic:
Any commercial activity involves financial risk. Situations in which counterparties to a transaction are unable to fulfill their contractual obligations occur quite often. The criteria for classifying receivables as uncollectible for collection are established in clause 2 of Article 266 of the Tax Code. The key aspects of recognizing a debt as bad are the timing of its formation, as well as circumstances indicating that the debt will not be collected by the methods established by law.
Is it possible to write off accounts receivable based only on the timing of its formation? The legislation does not provide such an opportunity, since in order to collect it, either the statute of limitations for judicial collection must pass, or the impossibility of its collection must be confirmed by a bailiff’s act on the impossibility of collection, the fact of liquidation of the debtor organization, etc.
If your company has bad debts, how to write them off correctly is one of the most pressing accounting issues. How to write off bad receivables is indicated in the key documents on the formation of a reserve for doubtful debts and the procedure for writing off at its expense amounts recognized as uncollectible:
- Tax Code of the Russian Federation;
- Regulations on accounting and reporting No. 34n dated July 29, 1998;
- Guidelines for inventory of property and financial obligations No. 49 of June 13, 1995, etc.
How to write off accounts receivable correctly? To write off this debt, the organization creates a special reserve for doubtful debts. Accounting for the reserve for doubtful debts is kept on account 63. When writing off amounts to replenish the reserve, an entry is made on the credit of account 63 and on the debit of account 91.
How to write off accounts receivable
In order for an uncollectible debt to be written off against the reserve, it must be recognized as such. The grounds for recognizing receivables as bad may be:
- expiration of the statute of limitations;
- other cases that make the debt unrealistic for collection. Such cases may be: liquidation of the debtor organization, receipt of an act of the bailiff on the impossibility of collection, etc.
When can accounts receivable be written off? There is a misconception that writing off “receivables” using reserve funds is possible only after the expiration of the statute of limitations for its collection. This statement is fundamentally incorrect, since the law provides the opportunity to write off such debt if circumstances arise that directly indicate that it cannot be collected. For example, such circumstances may be recognized:
- inability to fulfill an obligation for reasons beyond the control of the parties in accordance with Art. 416 Civil Code (natural disasters, terrorist attacks, military actions, etc.;
- publication of an act of a state body (Article 417 of the Civil Code);
- liquidation of the debtor organization or death of the debtor - an individual (Article 418-419 of the Civil Code), etc.
The impossibility of collection can also be confirmed by an act of the bailiff on the termination of enforcement proceedings and the return of the enforcement document to the recoverer.
How to write off accounts receivable - postings
The fact of the formation of receivables must be documented. The amount of debt is reflected in the act drawn up based on the results of the inventory. Documents confirming the occurrence of receivables are attached to the act. To write off debt, an order (instruction) is issued from the head of the organization (clause 77 of the Accounting Regulations).
How to write off overdue accounts receivable that are recognized as bad? The amount of such debt is written off from the reserve for doubtful debts. This operation is reflected in accounting with the following entries:
- D 63, K 62 (58-3, 76, 60...) – write-off of accounts receivable from the reserve;
- D 91-2, K 62 (58-3, 76, 60...) – write-off of accounts receivable if the formed reserve is insufficient (the difference is reflected).
How to write off accounts receivable and what nuances to take into account.
Any bad debts, including those that have passed the statute of limitations, must be written off. If this procedure is carried out in a timely manner, the company ensures the reliability of its financial statements, since indicators of receivables and payables are important components of the assets and liabilities of a legal entity.
It is also necessary to write off accounts receivable for tax accounting, since in this case the tax base is adjusted. This, in turn, affects the correct calculation of taxes.
First, let's understand the terms. Accounts receivable refers to the amount of money that a company owes to its counterparties. This could be, for example, debts for the delivery of goods. An increase in receivables can be regarded as an increase in the company's growth rate, however, it is important to ensure that funds are returned on time so that the financial viability of the legal entity is not jeopardized.
Accounts payable is the opposite concept. This is the money that the company owes to its creditors. These two terms do not always have a negative connotation. Often these are simply obligations for which the deadline has not arrived.
Write-off of receivables and payables postings
Every year, companies conduct an inventory, including accounts payable. If an accountant finds a debt that has expired, it is written off.
Accounts payable are written off uniformly for both tax and accounting purposes. The following entries are used: Dt 60 (76,70,71,73) Kt 91.1 - written off accounts payable is reflected. To write off you will need:
- contract;
- acts of services rendered, invoices;
- Act of reconciliation;
- claims of the parties to each other.
The procedure for writing off accounts receivable in accounting is as follows:
- Dt 63 Kt 62 (60,76,71,73,70) - accounts receivable are written off;
- Dt 007 - reflect the written-off debt on the balance sheet.
If the reserve has not been formed or it does not cover the debt, entries Dt 91.2 Kt 62 (60,76,71,73,70) and Dt 007 are used accordingly.
The reserve is calculated separately for each debt. Since 2011, enterprises have been required to form it.
In tax accounting, accounts receivable are written off using reserves. If it is not there or there is not enough money, the debtor is included in non-operating expenses in the period when the statute of limitations has expired or the impossibility of collection is confirmed.
We will look at writing off accounts receivable in more detail below.
How to write off accounts receivable?
If, after an inventory count, receivables are discovered, the company draws up an inventory order, and the results are entered into the INV-17 form. The next stage of writing off accounts receivable: creating a management order to liquidate the debt based on the inventory report and accounting certificate. The certificate should indicate the amount of the receivable, describe the situation with the debt, list the reasons why it became hopeless, and provide a link to the number and date of the inventory report.
To avoid receiving claims from the Federal Tax Service after writing off the receivables, you should attach to the act a document with the history of the debt and paperwork about the transaction: contracts, invoices, invoices, certificates of services rendered and reconciliations. As a document confirming the hopelessness of the debt, you can send an extract from the Unified State Register of Legal Entities or a resolution of the bailiff.
Note!
The debt of a company expelled from the Unified State Register of Legal Entities after 2014 can be considered bad. However, this will not work with IP. It is impossible to write off a businessman’s debt only on the basis of an exception from the Unified State Register of Individual Entrepreneurs, since he is liable for the debts with all his property. This is possible if an individual has died, gone bankrupt or his whereabouts are unknown.
Deadlines for writing off accounts receivable
The period for writing off accounts receivable is 3 years. This is the limitation period for the company's debts. However, it may be interrupted in the following cases:
- the debtor signed the reconciliation act or accepted it;
- the debtor asked for a deferment;
- part of the debt has been paid;
- the firms drew up an additional agreement to the contract in which the debtor acknowledged the debt;
- a lawsuit was filed.
If the period for writing off receivables is interrupted, it begins to flow again. But this period should not exceed 10 years.
Expired accounts receivable
The Tax Code of the Russian Federation states that the following are recognized as bad debts (in other words, unrealistic for repayment):
- for which the statute of limitations has expired;
- for which the obligation has been terminated based on the liquidation of a legal entity or an act of a government agency;
- which are confirmed by the bailiff’s decision on the completion of enforcement proceedings.
Let's look at the third point separately. A bailiff may declare a debt bad if:
- the location of the debtor is unknown;
- it is impossible to find out information about the company’s money or property;
- The company does not have property that can be sold and used to pay off debts.
In addition, bad debts include money owed by a person declared bankrupt.
In practice, what most often occurs is the write-off of expired accounts receivable. It is unlikely that after 3 years the debtor, on his own initiative, will want to repay the debt. Therefore, it is advisable for the creditor to write off expired receivables in order to put internal documents in order.
Inventory
Let's consider the features and procedure for inventory as a mandatory stage prior to writing off accounts receivable. In relation to the topic of this article, inventory must be carried out in 3 cases:
- before preparing accounting reports;
- during reorganization or liquidation of a legal entity;
- when creating a reserve for doubtful debts.
The company itself prescribes in its accounting policy how and when inventory is carried out. This includes establishing the number of procedures per year, the timing of their implementation, and the list of property and liabilities that are subject to verification.
Inventory involves the following stages:
- In the accounting department of an enterprise, they draw up a certificate of accounts receivable and accounts payable. It contains information about the amount of debts, the reasons for their occurrence and details of supporting documents;
- settlements are reconciled with the accounting department of counterparties, only after this the debt is considered agreed upon;
- an inventory report of settlements with debtors and creditors is drawn up (according to form No. INV-17). Separately, it indicates the amount of bad debts, for example, accounts receivable with an expired period of limitation;
- a decommissioning order is being prepared.
Writing off accounts receivable in accounting
Let's consider writing off accounts receivable in accounting. As stated in the order of the Ministry of Finance of Russia dated July 29, 1998 No. 34n, all settlements with creditors and debtors of the company must be reflected in the accounting records. For loans and credits, the amount is indicated at the end of the reporting period along with interest.
Expired accounts receivable and other uncollectible debts are written off on a per-obligation basis. This is done on the basis of an inventory document, a written justification and an order from management.
Note!
When accounts receivable are written off, according to the statute of limitations, they are included in the reserve for doubtful debts or in the company’s income if the debt amounts were not reserved.
Write-off of expired receivables due to the insolvency of the debtor is not considered cancellation of the debt. It is reflected on the balance sheet for 5 years from the date of write-off of receivables. This is necessary so that when the debtor’s property situation improves, the debt can be collected in a timely manner. Only after 5 years does the final write-off of accounts receivable with the expired period of limitation occur.
The procedure for writing off receivables in accounting depends on whether the organization has created a reserve in case of doubtful debts. If there is one, the documents indicate: Dt 63 Kt 62 (76 or other debt accounts). If the debt exceeds the reserve, Dt 91.2 Kt 62 is entered. If there is no reserve, entries Dt 91.2 Kt 62 and Dt 007 are drawn up.
Let's take a closer look at some controversial issues regarding the write-off of expired accounts receivable. The law talks about the need to conduct an inventory. It is required in the following cases:
- property is leased, purchased or sold;
- is transformed into a municipal unitary enterprise or state unitary enterprise;
- financial statements are prepared at the end of the year;
- the composition of financially responsible persons has changed;
- facts of theft at the enterprise were revealed;
- an emergency occurred;
- the company is reorganized or liquidated.
According to judicial practice, taxpayers are not required to include bad debts with a past statute of limitations as part of non-operating expenses of the tax period in which this period expired. Such conclusions are enshrined in the decisions of at least 3 lower courts. However, the Supreme Arbitration Court called them not based on the provisions of the current legislation.
The Supreme Arbitration Court indicated that, according to the general rule specified in the Tax Code of the Russian Federation, errors in calculating the tax base relating to previous periods should be corrected for the period in which they were made. At the same time, the same code gives companies the right to recalculate the tax base and the amount of payment for the period in which errors were discovered if they led to the payment of a tax in a larger amount than necessary. The Supreme Arbitration Court emphasized that such distortions in documents do not violate the interests of the treasury. Accordingly, it is permissible to both submit an updated declaration for the previous period and reflect the corrected information in the current documentation.
It is assumed that by the time the error is corrected, the 3-year period for returning the overpayment has not yet expired. After all, according to the law, only during this time the company has the right to dispose of the amount of tax overpaid to the budget.
The Supreme Arbitration Court also noted that the subject of an on-site tax audit may be the correctness of calculation and timely payment of taxes. Federal Tax Service employees do not have the right to check additional accrual of arrears, which the company being inspected should not have.
The Supreme Arbitration Court stated that, in essence, writing off bad receivables as expenses of a legal entity is a way of adjusting income that was previously indicated in accounting documents, but in fact the taxpayer did not receive them. The purpose of this is to calculate the tax based on the actual financial result of the activity. Therefore, the fact that the company did not take measures to collect receivables does not mean that it was trying to save money unreasonably in this way.
Accordingly, the tax inspectorate, which has identified the fact of untimely recognition of expenses in the form of accounting for the write-off of receivables, must take into account the expenses when checking the correctness of the accrual of the obligatory payment to the treasury for the reporting period, and not refuse to account for expenses as such.
This position of the Supreme Arbitration Court of the Russian Federation means that the court allowed companies to write off receivables as expenses in later periods than those when the legal entity had such a right.
Write-off of accounts receivable in tax accounting
Let's consider writing off accounts receivable in tax accounting. This procedure is available only to those enterprises that calculate income tax using the accrual method. Companies under a simplified tax regime and those who pay a single tax on imputed income do not have the right to take bad debts into account in their expenses. This is also impossible for companies on OSNO.
The tax write-off of receivables again depends on whether a provision for doubtful debts has been created. If yes, then they are written off against the reserve. If not, the receivable is written off entirely to non-operating expenses. An expense is recognized on the date of the earliest event:
- expiration of the limitation period for debt collection through court;
- the entry about the debtor was deleted from the Unified State Register of Legal Entities;
- We received papers from bailiffs stating that it was impossible to collect the debt.
Note!
If the company paid an advance to the counterparty, and later this debt was recognized as bad, the VAT accepted for deduction must be restored.
If an organization decides to recognize a citizen’s debt as bad and, after writing off the receivables, to charge it as expenses, personal income tax must be paid on the amount of the debt. This requirement was established due to the fact that, from the point of view of the Federal Tax Service, the individual received a benefit, and the tax agent is the company that wrote off his debt. If the individual was working, insurance premiums must also be paid for him.
We will separately consider the issue of creating reserves for doubtful debts. The amounts of deductions in them are included in the number of non-operating expenses on the last day of the reporting period. How is the reserve amount calculated:
- if the debt arose more than 90 days ago, the full amount of the debt is included in the reserve;
- if the statute of limitations is 45-90 days, 50% of the debt amount is contributed to the reserve;
- if the debt is less than 45 days old, it does not affect the amount of the reserve.
If the taxpayer has not fully used the reserve in the reporting period, he has the right to transfer it to the next one.
Summary
The process of writing off expired receivables is prescribed in regulations. It must be strictly adhered to, otherwise you may receive criticism from the tax authority, including actual fines. Following established rules will help avoid accounting errors.
Before writing off accounts receivable, it is important to ensure that an inventory has been taken and the appropriate order has been issued.
Note!
In Russia, the list of grounds for writing off expired receivables has been expanded. In 2018, there is no need to wait 3 years; the debts of legal entities excluded from the Unified State Register of Legal Entities must be written off directly on the date of their removal from the register.
If a company is owed by an individual entrepreneur, exclusion from the Unified State Register of Individual Entrepreneurs alone is not enough to write off the debt. It is necessary that one of 3 conditions be met:
- death of an individual;
- declaration of bankruptcy;
- recognition by the bailiffs that the location of the debtor is unknown.
The complexity is explained by the fact that individual entrepreneurs are liable for debts with all their property.
Despite the clear procedure for writing off receivables, we recommend that before starting the procedure you make every effort to collect it. For example, the counterparty can be offered an installment plan or debt restructuring.
If you are confident that the documents submitted are correct, but the tax office revealed violations of the law during the audit, you have the right to appeal the decision of the government agency. Doing this without the help of a qualified specialist is not so easy. We recommend that for all questions related to illegal actions or inaction of officials, contact the lawyers of the Pravoved.ru portal.
1. How to document the write-off of receivables and payables.
2. How to reflect debt write-off in accounting and tax accounting.
3. Features of writing off and including bad receivables in expenses.
Debts of debtors and creditors for which the statute of limitations has expired, as well as other debts recognized as bad, are subject to mandatory write-off. In accounting, timely write-off of bad debts ensures the reliability of financial statements, since indicators of receivables and payables are integral components of the assets and liabilities of the organization. In tax accounting, by writing off debts that are unrealistic for collection, the tax base is adjusted, which affects the correctness of tax calculations. At first glance, writing off debt does not present much difficulty, but this is only at first glance. When an accountant is faced with the specific task of writing off bad debts, many questions arise: how to formalize them, how to reflect them in accounting, how this operation will affect the calculation of income tax, VAT, simplified tax system, etc. In this article, I propose to understand these and other practical aspects of writing off receivables and payables.
Documentation of writing off bad debts
- In addition, upon the fact of writing off debt in accounting, an accounting certificate is drawn up, which serves as confirmation of the completion of this operation.
The tax legislation does not contain requirements for documentary documentation of the write-off of receivables and payables; the main condition is the existence of grounds for recognizing such debt as bad (contracts, invoices, acts, extracts from the Unified State Register of Legal Entities for liquidated counterparties, etc.).
! Note: When writing off debt due to the expiration of the statute of limitations, write-off for tax accounting purposes must be carried out in the reporting period when the specified period expired, and not when the organization carried out an inventory and issued an order (Letter of the Ministry of Finance of Russia dated January 28, 2013 No. 03-03-06/1/38). Thus, timely inventory of debt (at least on the last day of each reporting period for income tax) is in the interests of the organization itself, so as not to make adjustments to the submitted tax returns, as well as to ensure that data on debt write-off in tax and accounting records coincided.
Write-off of accounts receivable
Tax accounting
The reflection of the write-off of bad receivables in tax accounting largely depends on the reason for its occurrence. The most common are the debt of buyers for products shipped but not paid for (work, services), and the debt of suppliers for listed advances that were not covered by deliveries. Let's see how writing off debtors' debts affects the calculation of income tax, VAT and simplified tax system:
Nature of debt |
Income tax | VAT | |
Buyer's debt for goods sold, work and services | Written off debt is included in expenses in full (including VAT) (Letters dated July 24, 2013 No. 03-03-06/1/29315, dated August 3, 2010 No. 03-03-06/1/517) 1. If the reserve for doubtful debts for tax accounting purposes was created: — written off debt reduces the amount of the reserve (regardless of whether this debt participated in the formation of the reserve or not) (Letter of the Ministry of Finance dated July 17, 2012 No. 03-03-06/2/78, subparagraph 2, paragraph 2, article 265 of the Tax Code of the Russian Federation) — written-off debt is included in non-operating expenses (in terms of excess of the amount of the created reserve) 2. If the reserve for doubtful debts for tax accounting purposes was not created: — written-off debt is included in non-operating expenses (Clause 2, Clause 2, Article 265 of the Tax Code of the Russian Federation) |
Write-off of debt does not entail VAT adjustments, since the tax was accrued on the date of sale (Clause 1, Clause 1, Article 167 of the Tax Code of the Russian Federation) |
The written-off debt is not taken into account in expenses, since previously the sales amount was not included in income, since it was not paid (Clause 1 of Article 346.17, Letter of the Ministry of Finance dated July 22, 2013 No. 03-11-11/28614) |
The seller's debt for the previously listed advance payment (prepayment) | Written off debt is included in non-operating expenses regardless of the fact of creating a reserve for doubtful debts in tax accounting, since receivables for prepayment to a supplier are not considered doubtful for tax accounting purposes and, accordingly, do not participate in the formation of the reserve. (Letter of the Ministry of Finance of Russia dated June 30, 2011 No. 07-02-06/115) |
VAT on the advance payment, previously accepted for deduction, must be restored during the period of writing off receivables (Letter of the Ministry of Finance dated April 11, 2014 No. 03-07-11/16527) |
Written off debt is not included in expenses (Letters from the Ministry of Finance dated March 30, 2012 No. 03-11-06/2/49, dated December 12, 2008 No. 03-11-04/2/195) |
As can be seen from the table, the procedure for including written-off receivables into expenses when applying the general taxation system depends on whether the organization created tax accounting or not. If a reserve was created, then bad debts are written off against the reserve and are not included in non-operating expenses. Wherein in tax accounting, it does not matter whether such debt was included in the formation of the reserve or not.
Accounting
For accounting purposes, bad debts of debtors are included in other expenses on the date of debt inventory and are reflected in account 91 “Other income and expenses” subaccount 91-2 “Other expenses”. In this case, debt written off due to the insolvency of the debtor after the expiration of the limitation period must be recorded in off-balance sheet account 007 “Debt of insolvent debtors written off at a loss” for five years in order to track the prospects for its repayment.
Unlike tax accounting, it is the right, but the responsibility of the organization in the presence of doubtful accounts receivable. Therefore, if a reserve for doubtful debts was created, then bad receivables are written off against it and are not included in other expenses. However, it must be remembered that in accounting, only the debt that participated in its formation can be written off from the reserve.
Debit | Credit | Contents of operation |
1. If a reserve for doubtful debts was not created in accounting or if the receivables subject to write-off did not participate in its formation |
||
91-2 | 62, 60, 76, etc. | Bad receivables written off as other expenses |
007 | ||
2. If a reserve for doubtful debts has been created in accounting And receivables subject to write-off were taken into account when forming it |
||
63 | 62, 60, 76, etc. | Bad accounts receivable are written off against the allowance for doubtful debts |
007 | The amount of debt written off is reflected on the balance sheet |
Write-off of accounts payable
The write-off of accounts payable with an expired statute of limitations, as well as the write-off of accounts receivable, is reflected in tax accounting when applying the general taxation system and the simplified tax system, depending on the reason for its occurrence: debt for goods (work, services) received but not paid for or debt on advances received from buyers.
Nature of debt | Income tax | VAT | simplified tax system |
Debt to the supplier for goods received, work services | (clause 18 of article 250 of the Tax Code of the Russian Federation) |
VAT previously accepted for deduction (when posting goods, works, services) is not restored (Letter of the Ministry of Finance dated June 21, 2013 No. 03-07-11/23503) |
Written off debt is included in the organization's income (clause 1 of article 346.15, clause 18 of article 250 of the Tax Code of the Russian Federation, Letter of the Ministry of Finance of Russia dated 08/07/2013 No. 03-11-06/2/31883) |
Debt to the buyer for the advance payment received (prepayment) | Written off debt is included in non-operating income in full (including VAT) (clause 18 of article 250 of the Tax Code of the Russian Federation) |
VAT previously paid on an advance received is not deductible. (Letter of the Ministry of Finance dated December 7, 2012 No. 03-03-06/1/635) |
The written off amount of debt is not included in income, since it was already taken into account earlier (at the time of payment from the buyer) clause 1 art. 346.17 Tax Code of the Russian Federation |
! Note: In tax accounting, any written off accounts payable (due to the expiration of the statute of limitations and for other reasons) is subject to inclusion in non-operating income. with the exception of debt (clauses 3.4, 11, 21 clause 1 of Article 251 of the Tax Code of the Russian Federation):
- before the budget for the payment of taxes, fees, penalties and fines;
- to state extra-budgetary funds for the payment of contributions, penalties and fines;
- to a participant owning more than 50% of the organization’s authorized capital (excluding debt to pay interest on loans);
- to an organization in the authorized capital of which your organization’s share of participation is more than 50% (with the exception of debt to pay interest on loans);
- to any member of your organization if the document confirming the debt forgiveness states that it is done to increase the net assets of your company;
- to the participants of the organization regarding unclaimed dividends.
Accounting
In accounting, written off accounts payable are included in the organization’s other income and are reflected in account 91 “Other income and expenses”, subaccount 91-1 “Other income”.
Difficult situations when writing off accounts receivable
Bad accounts receivable, as we have found out, are included in expenses for tax purposes, so their write-off must be approached with special attention. Often, an accountant has doubts about the “hopelessness” of a debt and the legality of classifying it as an expense. I propose to deal with the most common issues related to writing off accounts receivable.
- Is it possible to include in expenses the amount of debt with an expired statute of limitations if the debtor is in the process of bankruptcy?
According to the position of the Ministry of Finance of the Russian Federation, such debt is not included in non-operating expenses if the proceedings against the debtor have not been completed and the creditor is included in the register of creditors. In this case, the expiration date of the claim does not matter. A taxpayer can write off receivables only after the court declares the debtor bankrupt and excludes him from the Unified State Register of Legal Entities. (Letter of the Ministry of Finance of Russia dated 04.03.2013 No. 03-03-06/1/6313, Letter of the Ministry of Finance of Russia dated 23.09.2013 No. 03-03-06/2/39363, Letter of the Ministry of Finance of Russia dated 04.03.2013 No. 03-03-06 /1/6313)
- Is it possible to include in expenses the amount of bad debts for which no collection measures have been taken?
In accordance with court decisions and clarifications of the Ministry of Finance, bad receivables with an expired statute of limitations can be included in expenses for tax purposes, regardless of whether measures were taken to recover them or not. (Resolution of the Federal Antimonopoly Service of the Moscow District dated September 14, 2012 in case No. A40-85915/11-91-367, Letter of the Ministry of Finance of Russia dated February 21, 2008 No. 03-03-06/1/124, Letter of the Ministry of Finance of Russia dated November 25, 2008 No. 03- 03-06/2/158)
- Is the amount of receivables included in expenses if the debtor is recognized as an inactive legal entity and excluded from the Unified State Register of Legal Entities by decision of the tax authority (if no reports were submitted during the previous twelve months, no transactions were carried out on the current account)?
Until 09/01/2014 - is not included, since the exclusion of the debtor from the Unified State Register of Legal Entities does not constitute its liquidation and such a basis for writing off receivables is not provided for in clause 2 of Art. 266 Tax Code of the Russian Federation. (Letter of the Ministry of Finance of Russia dated 02.27.2013 No. 03-03-06/1/5556, Letter of the Ministry of Finance of Russia dated 07.07.2008 No. 03-03-06/1/309, Letter of the Ministry of Finance of Russia dated 11.12.2012 No. 03-03-06 /1/649)
From 01.09.2014 - included, since from this date Law No. 99-FZ of 05.05.2014 came into force, in accordance with which the Civil Code of the Russian Federation was supplemented with Art. 64.2. In accordance with this article, the exclusion of an inactive legal entity from the Unified State Register of Legal Entities is actually equivalent to its liquidation.
- At what point can accounts receivable be written off as non-operating expenses if settlements with the debtor have been reconciled?
The signing of an act of reconciliation of accounts is the basis for interrupting the statute of limitations, therefore, receivables can be written off and taken into account as expenses only after three years have passed from the date of signing the last act of reconciliation of accounts. (Letter of the Federal Tax Service of Russia dated December 6, 2010 No. ШС-37-3/16955)
- Is it possible to include bad receivables in expenses if there is a counter payable for this counterparty?
So, we have looked at the procedure for writing off receivables and payables in accounting and tax accounting. Once again, I would like to remind you that writing off bad debts is the responsibility of the organization and affects both financial statements and tax calculations. Therefore, it is necessary to write off the debts of counterparties that are unrealistic for collection in a timely and prudent manner, in which, I hope, the material in this article will help you.
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Legislative and regulatory acts
1. Tax Code of the Russian Federation
2. Civil Code of the Russian Federation
3. Regulations on maintaining accounting and financial statements in the Russian Federation, approved by Order of the Ministry of Finance of the Russian Federation dated July 29, 1998 No. 34n
4. Chart of accounts for accounting financial and economic activities of organizations and Instructions for its application, approved by Order of the Ministry of Finance of the Russian Federation dated October 31, 2000 No. 94n
You can familiarize yourself with the codes and orders of the Ministry of Finance at http://pravo.gov.ru/
5. Letters from the Ministry of Finance of the Russian Federation
Letters from the Ministry of Finance of the Russian Federation can be found on the official http://mfportal.garant.ru/
Accounts receivable may arise, for example, if the buyer does not pay for the goods supplied or if the supplier does not return the advance payment for the shipped shipment. This is how the company gradually accumulates the amount that its counterparties owe it. It’s good if debtors pay off their debts over time. However, it happens that some amount remains hanging and it is unrealistic to collect it. In this case, it is necessary to write off the overdue receivables.
Write-off of overdue receivables from the balance sheet is carried out in two cases. The first is after the debtor pays the entire amount. And the second - at the moment when the debt is recognized as bad. Everything is clear with the first category; let’s figure out when debts can be considered unrealistic for collection. One of the reasons: if, by law, the debtor’s obligation is terminated due to the fact that it cannot be fulfilled. For example, if the debtor company went bankrupt (clause 2 of Article 266 of the Tax Code of the Russian Federation).
Another reason is that the debt has expired. It is three years. However, it is important to choose the right moment from which to count the three-year period. For clarity, we will use the diagram.
Please note that the limitation period may be interrupted. This will happen if a claim is filed or the debtor acknowledges the debt.
Thus, the limitation period is interrupted on the day when the court accepted the application from the plaintiff. Or at the moment when the debtor acknowledged the debt and sent a letter or reconciliation report (Article 203 of the Civil Code of the Russian Federation).
There is an important point here that is often forgotten. After the claim period has been interrupted, it must be counted again. The time before the break does not need to be counted towards the new statute of limitations. This is clearly stated in Article 203 of the Civil Code of the Russian Federation. However, there is a limitation: the limitation period cannot exceed 10 years from the date of violation of the right. Even if the deadline was interrupted for some reason.
By the way, the statute of limitations may be interrupted even if your counterparty has partially repaid the debt, but refuses to sign the reconciliation report. The legislation does not list the actions of the debtor that provide grounds for interrupting the statute of limitations. However, such circumstances are described in the resolution of the Plenum of the Supreme Court of the Russian Federation dated November 12, 2001 No. 15, the Plenum of the Supreme Arbitration Court of the Russian Federation dated November 15, 2001 No. 18.
Question - So, if we sue the debtor, the statute of limitations will be interrupted?
Yes, but only if certain conditions are met. The claim must be filed in the court that has the right to consider such disputes in its jurisdiction. The statement of claim itself must be drawn up in accordance with all the rules and the state fee must be paid. This is the position of the Supreme and High Courts in paragraph 15 of the resolution of November 15, 2001 No. 18.
If any of these conditions are not met, the judges will leave the claim without consideration. In this case, the limitation period is not interrupted (Article 204 of the Civil Code of the Russian Federation).
So that you do not get confused, I will summarize what has been said. The limitation period will be interrupted if the debtor:
Signed the debt reconciliation act;
Partially repaid the debt;
Paid interest on late payment;
Asked for a deferment;
Wrote an application to offset mutual claims.
And one last condition - if the companies made changes to the terms of the agreement, from which it follows that the debtor acknowledged the debt. In this case, the statute of limitations will also be interrupted.
How to determine the statute of limitations
How to write off overdue accounts receivable in accounting
The amount of overdue debt is usually written off against the reserve for doubtful debts. This operation must be reflected by wiring:
DEBIT 63 CREDIT 62 (76)
- accounts receivable are written off at the expense of the created reserve.
It should be noted that the reserve can only be used within the limits of its size. It turns out that if the amount of expenses for debt write-off exceeds the amount of the created reserve, then the difference must be reflected as part of other expenses (clause 11 of PBU 10/99).
Write off the difference by posting:
DEBIT 91-2 CREDIT 62 (76)
- accounts receivable not covered by the reserve are written off.
Writing off receivables for which the statute of limitations has expired does not mean its cancellation. The written-off amount for five years is reflected in off-balance sheet account 007 “Debt of insolvent debtors written off at a loss.”
This is done by wiring:
DEBIT 007
- written off accounts receivable are reflected.
Question - We are a small business, so we do not create a reserve for doubtful debts. How to write off debt?
You need to use the “Other expenses” subaccount of account 91. That is, the accounting will be the same as in the case of debt that is not covered by the reserve.
How to take into account debt for income taxes
In tax accounting, bad receivables can be written off in two ways. The first option: through the created reserve for doubtful debts. In the manner established by paragraph 5 of Article 266 of the Tax Code of the Russian Federation. The second is to reflect it in non-operating expenses (subclause 2, clause 2, article 265 of the Tax Code of the Russian Federation).
The amount of debt not covered by the reserve can be included in non-operating expenses (subclause 2, clause 2, article 265, clause 5, article 266 of the Tax Code of the Russian Federation).
Question - Does it matter which calculation method the organization uses (cash or accrual method)?
Yes, this plays an important role. Only those organizations that calculate income tax using the accrual method can take into account bad receivables as expenses.
If an organization uses the cash method, then it will not be possible to take debt into account as expenses. The fact is that with this method, income must be recognized only after they are received, and costs - only after payment (clause 3 of Article 273 of the Tax Code of the Russian Federation). In this case, payment for the goods is recognized as the moment when the buyer’s obligations to the seller are terminated. Therefore, if goods sold are not paid for, then the obligation is not fulfilled. Therefore, expenses cannot be recognized.
The entire amount of uncollectible accounts receivable, including VAT, reduces taxable profit. A similar point of view is contained in letters dated July 24, 2013 No. 03-03-06/1/29315 and dated June 11, 2013 No. 03-03-06/1/21726.
Question - Our debtor was liquidated. But three years have not yet passed since the debt was created. Can we write off a bad debt without waiting for the statute of limitations to expire?
Yes you can. If the debtor company is liquidated, then you have the right to write off the amounts of receivables as part of non-operating expenses. But to do this, you must have documents indicating the liquidation of the debtor.
What documents should I submit?
To confirm accounts receivable, the company must have the appropriate documents (Part 1, Article 9 of the Federal Law of December 6, 2011 No. 402-FZ).
It is important to correctly determine the amount of overdue receivables. To do this, you need to conduct an inventory. The amount of the identified receivable is reflected in the act. It can be issued using form No. INV-17.
Let me remind you that inventory must be carried out on the basis of an order. In addition, it issues an order to write off overdue debts (see sample order below). The basis for its execution will be an inventory act and an accounting certificate (see sample certificate below). Follow paragraph 77 of the Accounting and Reporting Regulations.
Attach documents confirming its occurrence to the accounts receivable inventory report. These could be, for example, contracts that specify the terms for repayment of obligations by counterparties. I will name a few more supporting documents: invoices, acts of work performed, acts of inventory of receivables at the end of the reporting or tax period.