Doubtful and irrecoverable receivables

Receivables from customers need to be reviewed at each reporting date. All available information must be taken into account.

For example:

  • possible bankruptcy or financial difficulties of the debtor
  • late payments or changes in payment behavior
  • a drop in the debtor’s credit rating

You can check receivables one by one or all together. Bigger amounts should be checked individually. Smaller ones can be reviewed as a group. Historical data on past due receivables can be used to estimate potential losses when assessing receivables collectively.

The first step is to assess which receivables are unlikely to be collected and to recognise them as an expense. A receivable becomes a bad debt when there is reliable information indicating that the buyer is insolvent, at which point the receivable is written off from the balance sheet.

1. Review of a doubtful receivable
● If you group the receivables, there will be 2 line in the transaction:
Debit: 5550 Bad debts expense
Credit: 1290 Doubtful receivables

● If you review each receivable separately, the accounts remain the same, but it is recommended entering each receivable as a separate line under account 5550 Bad debts expense. In the “Description” field of the transaction, include the customer name and the invoice number that has been assessed as unlikely to be collected.
This way, the transaction will show which invoices you have reviewed. If the situation changes — for example, the customer pays an invoice previously assessed as bad debts expense — you can reverse the transaction for the respective amount.

Review of doubtful receivables (31.12.20×1):
Debit: 5550 Bad debts expense: Client A OÜ, invoice 222 (300 EUR)
Debit: 5550 Bad debts expense: Client C OÜ, invoice 201 (200 EUR)
Credit: 1290 Doubtful receivables (500 EUR)

Client A OÜ invoice was paid, so the earlier expense was reversed (18.03.20×2):
Debit: 1290 Doubtful receivables (300 EUR)
Credit: 5550 Bad debts expense: Client A OÜ, invoice 222 (300 EUR)

2. Recognition of a receivable as bad debt and removal from the balance sheet

To write off a receivable from the balance sheet and ledger, it is necessary to create a new account under “Accounts and cash” (if it hasn’t been created previously).

Settings -> Accounts and cash -> New account/cash register

● For the financial account, make sure to select 1290 Doubtful receivables.

● Deactivate the “Show on documents” button, as this account should not appear on documents.

● Go to the invoice marked as bad debt and select “Mark as paid” from the Actions menu. Instead of the regular bank account or cash, select the created account “Doubtful receivables”.

A transaction is created for the receipt:
Debit: 1290 Doubtful receivables
Credit: 1210 Trade receivables

The data should now be correct. It is still useful to check the sales ledger (Reports -> Sales ledger) and the balance sheet balances (this check should also be done before writing off receivables).

3. VAT reverse calculation

Since 1 January 2022, the VAT Act includes new rules that allow taxable persons to reduce their VAT liability if certain conditions are met and the receivable has become a bad debt.

Value-Added Tax Act – § 29. Calculation of amount of value added tax

(1) A taxable person has the right to reduce their tax liability by the amount of the value added tax calculated on the goods transferred or services provided, which have not been paid for in full or in part, according to the unpaid part if all the following conditions are met:
1) an invoice has been issued for the transferred goods or the provided service pursuant to § 37 of this Act;
2) the amount of the value added tax is calculated on the transaction and reflected in the value added tax return for the taxable period of the transaction;
3) the claim has not been transferred;
4) at least 12 months have passed since the due date for payment of the invoice, but not more than three years, except in the case specified in clause 6 of this subsection;
5) the claim has been written off in accounting because it has not been possible to collect the claim despite the efforts of the taxable person to make every effort to collect the claim, or the expenses incurred for its recovery exceed the estimated income receivable;
6) in the case of a claim containing value added tax exceeding 30,000 euros, the claim has been certified by a court judgment which has entered into force;
[RT I, 09.12.2021, 1 – entry into force 01.01.2022] 7) the purchaser of goods or the recipient of services is not a related person within the meaning of the Income Tax Act;
8) the taxable person has notified the purchaser of the goods or the recipient of the service in writing of the write-off of the claim in the accounting in the month of the write-off, indicating the amount of the value added tax related to the written-off claim.

(2) A taxable person shall adjust the amount of their value added tax due in the taxable period when the receivable was written off in the accounting by the amount of the value added tax calculated on the basis of subsection 1 of this section on the goods transferred or services provided which have not been paid for in part or in full.

(3) If a taxable person has reduced the amount of the value added tax payable pursuant to subsection 1 of this section, but the claim on which the reduction is based is subsequently paid in part or in full, the claim shall be included, in correspondence with the part paid for, in the taxable value of the taxable period when the claim was paid in part or in full.

(4) If a taxable person has failed to pay in part or in full for the goods or services but has deducted the value added tax included in the invoice unpaid in part or in full as input value added tax and received the notification of the write-off of the claim in accounting specified in clause 8 of subsection 1 of this section, the taxable person is required to increase their tax liability by the amount of value added tax related to that claim in the taxable period in which the notification is received.
[RT I, 23.02.2021, 1 – entry into force 01.01.2022]

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To reclaim VAT, a financial transaction must be recorded and the VAT statement settings need to be adjusted to ensure the data is reported correctly.

In the transaction, record the VAT amount on account 2511 VAT on sales in the debit and 4990 Other operating revenue in the credit.

On the next two lines, also use account 4990 Other operating revenue and enter the amount of the written-off invoice excluding VAT. On the line where the amount is recorded in the debit, make sure to also select the sales VAT type (in this example, 22% Goods sales, Estonia). This is necessary for the debit side of the account to be reflected in line 1 of the VAT statement.

Update the VAT report settings and add the account 4990d to the account rules on line 1 under the relevant VAT type.

If you have any additional questions, please write to us at support@simplbooks.ee

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