Treatment of Provision for Bad Debts in Balance Sheet

Identification of customer balances doubtful of recovery

On a quarterly basis an assessment of recoverability should be made in respect of the debit balance of each customer, based on the available information regarding payment patterns, credit limit and credit history.

The Commercial Department should carry out this exercise at the quarter end on the basis of inputs provided by the respective Branch. Criteria that can be used in such an assessment include repeatedly overdue accounts beyond credit period / normal practice, repeated unsuccessful reminders, history of non-payment, and any other events that demonstrate a risk of financial insolvency. The method used to estimate any unrecoverable receivables and the provision against the same should be applied consistently.

Provision for Doubtful Debts:-

Provisions should be made on a case-to-case basis, and after a careful evaluation of the facts of each case. A list of all amounts agreed to be provided for should be prepared and then approved jointly by the SM-S&D at HO and the concerned Branch Head. This approved list should be sent to the GM F&A for obtaining the approval.

Bad Debts:-

Any debts that will not be recovered should be written off from the books of account, after obtaining approval of the GM F&A. This should however be done on a case-to-case basis. Certain indicators that should be used for identifying bad debts are as follows:

  • Presence of discouraging correspondence 
  • Collection is barred by statute of limitation and the customer has also refused to pay 
  • Accounts Receivable have either become insolvent or gone into liquidation, disappeared, have gone out of business or have deceased 
  • Concerted effort should be made and documented for records to realise such debt and only when management is of the opinion that recovery is not possible, should they consider the amount for writing off as bad debt. 
A list of all amounts agreed to be written off should be prepared and proposed jointly by the concerned SM-S&D at HO and Branch Head. If the amount to be written off is more than a particular amount (to be decided by the Senior Management from time to time), it should be sent to the GM F&A and MD for obtaining the approval.

Actual bad debts should first be set-off against any provision for doubtful accounts if the same already exists. Bad debts in excess of the provision for doubtful accounts should be accounted for as an expense.

In case where legal cases have been filed or the Company wants to initiate legal action to recover its debt, the same should not be written off from the books of account till such case is settled or dismissed.


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