Accounts receivable registers are created on the basis of unsettled invoices and advance payments from purchasers. Accounts receivable are considered as bad debts if they are not settled within the term that is specified in the purchase agreement. Debts are considered to be unrecoverable if they are older than three years.

All bad and unrecoverable debt that arises during the Accounts receivable inventory is included in the company's bad debt reserve. This inventory is run at the completion of the tax period.

The bad debt reserve is created in accordance with the following principles:

  • Debt that is less than 45 days past the due date is not included in the reserve.

  • If the payment term is exceeded by 45–90 days, the reserve amount is 50 percent of the debt.

  • If the payment term is exceeded by more than 90 days, the reserve amount is 100 percent of the debt.

  • The reserve amount cannot exceed 10 percent of company revenue for the tax reporting period. Moreover, this amount is corrected to the reserve balance amount of the previous period.

  • If the reserve amount for the current quarter is less than the reserve balance amount for the previous quarter, the difference must be included in unrealized revenues.

  • If the reserve amount for the current quarter is more than the reserve balance amount, the difference must be included in unrealized expenses.

The reserve can only be used to cover losses from unrecoverable debt under certain circumstances.

  • If the reserve amount is higher than the unrecoverable debt, the difference between the reserve and the unrecoverable debt is transferred to the next reporting period.

  • If the reserve amount is less than the unrecoverable debt, the difference between the unrecoverable debt and the reserve must be included in unrealized expenses, reducing the taxable profits.

Refer to the following forms to verify your calculations and confirm the use of the reserve for bad debt:

  • Accounts receivable inventory act

  • Accounts receivable – bad debts reserve

  • Accounts receivable - bad debt reserve movement

  • Accounts receivable movement

  • AR amortization

See Also