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Provision for Doubtful Debts
Hi,
I've got a supplier that has gone into liquidation with unpaid invoices. I'm currently uncertain as to whether I'll be able to recover any of the outstanding balance.
I understand the correct way to account for this is to not write it off as a bad debt at this stage, but to make a provision for it as a doubtful debt.
What is the best way to do this in FreeAgent? I suspect I'll need to add journal entries manually? I think I need to add a debit to the P&L and a credit to the provision for doubtful debts account. However, there doesn't seem to be a 'provision for doubtful debts' account in FreeAgent.
Do you have any suggestions?
I've got a supplier that has gone into liquidation with unpaid invoices. I'm currently uncertain as to whether I'll be able to recover any of the outstanding balance.
I understand the correct way to account for this is to not write it off as a bad debt at this stage, but to make a provision for it as a doubtful debt.
What is the best way to do this in FreeAgent? I suspect I'll need to add journal entries manually? I think I need to add a debit to the P&L and a credit to the provision for doubtful debts account. However, there doesn't seem to be a 'provision for doubtful debts' account in FreeAgent.
Do you have any suggestions?
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Inappropriate?Hi Minstrel,
It's quick to write off an invoice as a bad debt in FreeAgent - but would, as you say, require several journal entries to provide for a doubtful debt, and you'd then have to do those entries again in reverse when your customer either paid you or you wrote the invoice off as a bad debt.
How long do you expect it to be before you know whether you're going to receive any money at all for those invoices?
Because what I would probably do here is, if you expect to hear soon, hang fire until you know whether or not you'll get paid, then you can either write the invoices off as unpaid or record the receipts.
If you don't know when you'll hear, or you think it could take a while, then please do let me know by posting a reply here and I'll write you some notes on how to post the journals for doubtful debts.
Kind regards,
Emily -
Inappropriate?Thanks Emily.
The company that owes the money is in liquidation and it's probably going to take a long time to resolve as the liquidator has concerns about the Directors' actions and there a potential wrongful trading case which could take months to conclude.
I'm keen to make a provision for doubful debts as I want to avoid the Corporation Tax liability (the company went into liquidation right at the end of my financial year).
If you could post a couple of notes on how to update the journals I'd be very grateful. -
Inappropriate?Hi Minstrel,
Yes of course, I'll post you some notes on how to do the journals.
Could I just check please, are you registered for VAT, and if so, are you cash accounting for VAT or invoice accounting for VAT?
Kind regards,
Emily -
Inappropriate?Hi Emily,
Yes - I'm VAT registered on the cash accounting scheme.
Many thanks -
Inappropriate?Hi Minstrel,
OK, great, then you won't have already paid over the VAT to HMRC, so we don't need to worry about bad debt relief.
Here's how to post the journals:
Go to Accounting > Journal Entry.
Click New Journal Entry.
Post the first journal entry to code 450, Bad Debts Written Off (use this code as we don't have one in the profit and loss account for doubtful debts).
Enter the date as the last date of your accounting year.
Put in the amount of the doubtful debt, excluding VAT, as a plus.
Put in a description such as "Provision for doubtful debt from [customer's name]".
Click Create and Add Another.
Post the second journal entry to code 681, Trade Debtors.
Enter the same date as before.
Put in the amount of the doubtful debt, including VAT this time, as a minus.
Put in the same description as before.
Click Create and Add Another.
Post the third journal entry to code 823, Deferred VAT.
Enter the same date as before.
Put in the amount of the VAT on the doubtful debt, as a plus.
Put in the same description as before.
Click Create New Entry.
That's it.
So if you had #575 of doubtful debts, including VAT (apologies, I'm using a US keyboard with no pound sign), then the first journal would be for 500.00, the second for -575.00 and the third for 75.00.
When the debt either comes in or is written off, you'd need to post those three journals again, as at the date the debt was paid or written off, BUT reverse the signs this time. So the first and third would be minuses and the middle one a plus.
To write off a bad debt you can use the "Write-off Unpaid" button on the invoice.
I hope that helps. Please do ask if you get stuck with any of that.
Kind regards,
Emily
1 person says
this answers the question
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Inappropriate?Hi Minstrel,
No problem at all. Please don't hesitate to ask if you get stuck again.
Kind regards,
Emily
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