J bad debts is the amount of money owed to creditors that is unlikely to be paid and, or which creditor does not take action to collect for various reasons, often because the debtor has no money to pay, for example because the company enter into liquidation or bankruptcy. There are various technical definitions of what constitutes bad debt, depending on the accounting conventions, regulatory treatment and institutional provision. In the US, bank loans with more than 90 days in arrears become "problem loans". Accounting sources informed that the full amount of bad debt was written off to the profit and loss account or allowance for bad debts as soon as it was foreseen.
Video Bad debt
Credit skepticism
Debt in doubt is debts that may not be collected by a company or individual. The reasons for inability to pay may include supply disputes, delivery, condition of goods or the emergence of financial pressures in customer operations. When such disagreements occur, it is wise to add debt or parts to the doubtful debt reserves. This is done to avoid over-stating business assets as a net trading debtor reported from Doubtful debt. When there is no doubt that debt can not be collected, debt is bad. Examples of uncollectible debt are: - once the final payment has been made from the liquidation of the customer's limited company, no further action can be taken.
Maps Bad debt
Doubt of debt reserves
Also known as bad debt reserves , these are the counter accounts listed in the current assets section of the balance sheet. The doubtful debt reserves have some money to allow a reduction in the accounts receivable ledger due to non-debt collection. This can also be called an allowance for bad debts. Once the doubtful debts become uncollectable, they will be eliminated.
Accounting practices in different countries
United States
Allowance for bad credit is the amount that is not expected to be billed, but still with the possibility of being collected (when there is no possibility of other collection, they are considered uninvoiced account ). For example, if the gross receivable is US $ 100,000 and the expected amount remains uncollectible is $ 5,000, net receipts will be US $ 95,000.
In financial and financial accounting, bad debts are part of accounts that can no longer be collected, usually from accounts receivable or loans. Debt in accounting is considered an expense.
There are two methods for calculating bad debt:
- The direct removal method (Non-GAAP) - accounts that are not considered to be charged are charged directly to the income statement.
- Payment Methods (GAAP) - estimates are made at the end of each fiscal year of the amount of bad debt. These are then accumulated in the provisions which are then used to reduce certain receivable accounts as and when necessary.
Due to the principle of accounting matching, revenues and expenses should be recorded in the period in which they occur. When a sale is made in the account, revenue is recorded with the accounts receivable. Because there is an inherent risk that the client may fail the payment, the receivable should be recorded at the net realizable value. The portion of the estimated receivables that can not be charged is set aside in a counter-asset account called Allowance for doubtful accounts . At the end of each accounting cycle, an adjustment entry is made to charge the bad debts as expenses. The actual amount of bad debts is written off as a cost of Allowance for doubtful accounts .
Taxability
Some types of bad loans, whether business or non-business related, are considered tax deductible. Section 166 of the Internal Revenue Code provides the requirements for which bad debt should be reduced.
Criteria for deduction
In order to be deemed deductible, the debt must:
- bona fide debt, and
- is not valuable in the tax year.
Debt is defined as a debt arising from a creditor's relationship under a legitimate and liable obligation to pay a specified amount of money. The debt should also be considered worthless. This difference is further broken down into collection levels. One must determine whether the eligible debt is truly or partially worthless. A partially worthless status means that part of the debt can be recovered in the coming period. Many factors are considered including bankruptcy bankruptcy status, health condition, credit reputation, etc.
Section 166
Section 166 limits the amount of deduction. There must be some tax capital, or basis, questionable to recover. In other words, is there a customized basis for determining the gain or loss on the debt in question.
An additional factor in applying the criteria is the classification of debt (non-business or business). Business bad debts are defined as debt created or obtained in connection with the trade or business of the taxpayer. Meanwhile, non-business debt is defined as debt not made or obtained in connection with the trade or business of the taxpayer. This classification is quite significant in terms of deductibility. Non-business bad debts must be absolutely worthless to deduct. However, a bad debt business can be deducted whether it is partly or wholly worthless.
Troubled debt mortgage
Mortgages that may not be categorized can be written off as bad debt as well. However, they are under slightly different rules. As stated above, they can only be written off against tax capital, or income, but they are limited to $ 3,000 per year deductions. The above losses can be carried over to subsequent years of the same amount. Thus, a $ 60,000 mortgage debt will take 20 years to be eliminated. Most junior owners (2, 3, etc.) fall into this when the first mortgage closes without the rest of the equity to pay on junior liens.
There is one option available for a mortgage that is not available for business debt - donations. The difference is that a $ 10,000 valuation can be taken without an assessment. An assessment may increase its value to more and should be based on other similar mortgages that are actually sold, but generally less than their face value. The real difference is that as a contribution, the amount of deduction is limited to 50% of Gross Revenue Adjusted per year with carryover taken over the next 5 years.
. This is because deduction is now classified as a donation, not a bad debt elimination and using Schedule A instead of Schedule D
. This can significantly increase tax deductions this year compared to simple deletions. The warning is that it must be completed BEFORE until the date of foreclosure and final loss. The process is simple, but finding a charity to work together is difficult because there will be no cash value as soon as the first mortgage closes.
Troubled loans
In the US, bank loans with more than 90 days in arrears become "problem loans".
References
External links
- glossary of NYSSCPA accounting terms
Source of the article : Wikipedia
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