What Is Bad Debt And How To Deal With Bad Debt

Bad debts are accounts receivable that enterprises cannot recover. It is a very normal phenomenon that enterprises have bad debts and cause bad debt losses. According to the relevant regulations of our country, the accounts receivable of enterprises that meet one of the following conditions shall be recognized as bad debts: ① due to the death of the debtor, it can not be recovered after paying off with its heritage; ② Due to the bankruptcy of the debtor, it can not be recovered after paying off with its bankruptcy property; ③ The debtor has not performed its debt repayment obligations for a long period of time (such as more than 3 years), and there is sufficient evidence to indicate that it is impossible or unlikely to recover. An enterprise shall conduct a comprehensive inspection of receivables at regular intervals or at least at the end of each year, predict the possible bad debts of various receivables, and accrue bad debt reserves for receivables that are not sure to be recoverable. An enterprise can only use the allowance method to account for bad debt losses. The methods of withdrawing bad debt reserves include balance percentage method, aging analysis method, sales percentage method, etc. The specific method can be determined by the enterprise itself. An enterprise shall list a list, specifically indicating the scope of provision for bad debts, the method of withdrawal, the division of account age and the proportion of withdrawal. According to the management authority, the list shall be approved by the shareholders' meeting or the board of directors, or the manager's (factory director's) meeting or similar institutions, and submitted to the relevant parties for filing in accordance with laws and administrative regulations. The list shall be kept at the location of the company for reference by investors. Once the method of drawing bad debt reserves is determined, it shall not be changed at will. If changes are needed, they should still be submitted to the relevant parties for filing after approval according to the above procedures, and explained in the notes to the accounting statements. When determining the proportion of bad debt provision, an enterprise shall reasonably estimate it according to its previous experience, the actual financial position and cash flow of the debtor, and other relevant information. Except that there is conclusive evidence that the receivables cannot be recovered or are unlikely to be recovered (such as the debtor's cancellation, bankruptcy, insolvency, serious shortage of cash flow, serious natural disasters and other reasons leading to shutdown and inability to pay debts in a short period of time, as well as receivables overdue for more than 3 years), bad debt reserves cannot be fully accrued under the following circumstances: (1) Receivables incurred in the current year; (2) Plan to restructure receivables; (3) Receivables with related parties; (4) Other overdue receivables without conclusive evidence to prove that they cannot be recovered. If there is conclusive evidence proving that the unmatured notes receivable held by the enterprise cannot be recovered or is unlikely to be recovered, its book balance shall be transferred to accounts receivable and corresponding bad debt reserves shall be withdrawn. If there is conclusive evidence that the prepayment of an enterprise does not conform to the nature of the prepayment, or it is no longer expected to receive the purchased goods due to the bankruptcy or revocation of the supplier, the amount originally included in the prepayment shall be transferred to other receivables, and the corresponding bad debt reserves shall be accrued. The enterprise shall find out the reasons for the uncollectible accounts receivable and investigate the responsibility. According to the management authority of the enterprise, the accounts receivable that have conclusive evidence to prove that they are indeed uncollectible, such as the debtor's cancellation, bankruptcy, insolvency, serious shortage of cash flow, etc., are approved by the general meeting of shareholders or the board of directors, or the manager (factory director) office meeting or similar institutions as bad debt losses to write off the withdrawn bad debt reserves.