Can someone give me some advice please as to how to handle debts at year end.
So example, we are owed money for activity which has taken place in the year, however, a customer might be taking extra long to pay e.g. 90 days instead of 30 days which takes us past our year end reporting by 2 months.
Scenario 1 - The company will pay but the payment will be received in the next financial year.
Scenario 2 - The company is saying it will pay but it's looking increasingly unlikely, but there's still a chance.
Scenario 3 - The company has gone into liquidation and we won't receive any money.
I think, although my knowledge is sketchy;
Scenario 1 - We would normally accrue for future income, however, with this being at year end I am a little confused as to what to do here?
Scenario 2 - Create a specific provision.
Scenario 3 - Write of as a bad debt.
Scenario 1 is probably the one I need to understand the most but the double entries for all 3 would be much appreciated just so that I can get my head around it all again.
(1)
Income and expenditure are recognised in the P&L in the period to which they relate not when they are paid or received (not going to complicate this with the cash basis of accounting).
If such are not paid / received by the period end then such is carried in the balance sheet in Accruals and Prepayments and in the period that they are paid / received such is a balance sheet only, not P&L, movement.
Your right, this is the one that you need to understand first as it's the fundamental basis of the accruals basis of accounting.
(2)
Provisions for bad debts can be problematic in that they have been used to manipulate earnings (earnings management). Of course, such is only on paper as a provisions for bad debts is not allowable for tax purposes (to be allowable the debt must be written off. Basically it becomes real).
In your case the company is saying that it will pay but in the next period so I see no reason to create a provision. This is simply a clients outstanding account going over the period end.
(3)
Correct, when there is no hope of getting payment you would write the debt off and keep a specific note on the client account as to why the debt was written off.
HTH,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
If I remember correctly, there is an HMRC process by which you may apply to recover the VAT element of amounts written off after a specified period of time (not sure but think it might be 6 months).
