What is an uncollectible receivable?

How debts are formed

Accounts receivable and payable are an obligatory component of the financial and economic activities of any organization. It is impossible to work without debt. This is not about loans, credits and borrowings. Debtor and creditor are formed during standard business transactions.

For example, the usual delivery of goods means the emergence of an obligation to the supplier to pay for the products provided. This is how a creditor is formed. But transferring an advance to suppliers or shipping goods to the buyer without payment is an example of the occurrence of receivables: a third-party entity has obligations to the organization.

Tax accounting for bad debts

When the statute of limitations for amounts of receivables has expired, as well as when it has been established that it is impossible to collect them, such debts are considered hopeless for collection. They must be written off in full, including the VAT rate.

Write-offs must be indicated in the income tax return, according to the form approved by the Federal Tax Service of the Russian Federation. You must indicate the amount of bad debts to be written off. Also, if a legal entity has a special reserve fund for doubtful debts, indicate the amount of bad debts that are not covered by risk reserves. All amounts of such debts are added up and summarized as a result.

When running a business, it is impossible not to sell goods or services on bad credit, but you should always keep in mind that such business activities can lead to bad debt. To extract the maximum benefit from such a situation, you should correctly take into account funds that are questionable for collection, for which you need to conduct a regular inventory.

Having understood all the intricacies of tax and accounting, you can reduce the amount of income tax, which at least partially compensates for the loss from non-payment. And of course, you should always conclude an agreement that clearly states all the terms of the deal, time frames and other obligations.

Why is this necessary?

When conducting an inventory of liabilities, accountants often identify debts whose status has not changed for a long time. And it is not possible to collect such debt due to various factors. There is no point in leaving the delay in accounting. The amount can be written off as expenses of the organization.

The essence of such a decision as recognizing a debt as uncollectible is the ability to take into account the company’s losses for taxation (clause 2, clause 2, article 265 of the Tax Code of the Russian Federation). It is impossible to collect an uncollectible debt. Consequently, part of the organization's money or assets is completely lost. And this is a loss.

But not all types of delays can be taken into account for tax purposes. An exhaustive list of situations is enshrined in paragraph 2 of Art. 266 Tax Code of the Russian Federation. Consequently, if a company has a debt in its accounting that does not comply with the norms of fiscal legislation, then the recognition of bad receivables on it is not allowed, which means that losses cannot be taken into account when calculating income tax.

Conditions for recognizing a debt as bad

Reasons for what is permitted

When calculating income tax, amounts of bad debts are equated to non-operating expenses (not related to production and sales) if they are not written off from the reserve for doubtful debts, as well as in the absence of such a reserve (subclause 2, clause 2, art. 265 NK).
According to paragraph 2 of Article 266 of the Tax Code, bad debts are those debts to the taxpayer for which the established limitation period has expired, as well as those debts for which, in accordance with civil law, the obligation has been terminated due to the impossibility of its fulfillment on the basis of an act of a state body or liquidation of the organization. It should be noted that the list of grounds on which a debt can be considered unrealistic for collection is closed (letter of the Ministry of Finance dated February 6, 2007 No. 03-03-07/2).

In practice, the reasons for recognizing a debt as bad are often the expiration of the statute of limitations and the liquidation of the organization.

Expired

According to the official position, in order to recognize a debt as bad due to the expiration of the limitation period, the expiration of such a period is sufficient. This means that the creditor organization does not have to take measures to collect this debt. Thus, the Ministry of Finance in letter dated September 30, 2005 No. 03-03-04/2/68 explains: “The Tax Code does not establish that a debt is recognized as bad due to the expiration of the statute of limitations provided that all measures are taken to settle the debt.” .

The arbitration courts of the Moscow District also agree in their decisions with the opinion of the financial department: “Tax legislation does not indicate filing a claim in court as a condition for recognizing a debt as bad” (Resolution of the Federal Antimonopoly Service of the Moscow District dated March 19, 2007 No. KA-A40/1765-07) . Similar conclusions are contained in the resolutions of the Federal Antimonopoly Service of the Moscow District dated March 19, 2007 No. KA-A40/1765-07, dated September 17, 2006 No. KA-A40/7292-06, dated April 4, 2006 No. KA-A40/2276- 06-2, dated November 21, 2005 No. KA-A40/11239-05.

To confirm the fact that the debt has not been repaid at the time of its write-off, you must have acts of debt reconciliation with debtors, acts of inventory of receivables at the end of the reporting (tax) period, an order from the manager to write off receivables as a bad debt (letter from the Federal Tax Service for Moscow dated December 13 2006 No. 20-12/109630).

Bankrupt debtor

Bad debts are debts for which the obligation has been terminated due to the liquidation of the organization (clause 2 of Article 266 of the Tax Code). At the same time, amounts unrealistic for collection are written off as part of non-operating expenses from the date of exclusion of the taxpayer-debtor from the Unified State Register of Legal Entities (letter of the Ministry of Finance dated February 6, 2007 No. 03-03-07/2).

But is an entry in the Unified State Register of Legal Entities about the liquidation of an organization sufficient to allow one to confidently include debt amounts in non-operating expenses? With regard to enterprises undergoing bankruptcy proceedings, official bodies and courts have a different point of view.

According to the opinion of the Ministry of Finance expressed in earlier letters (dated January 28, 2005 No. 07-05-06/28, dated April 21, 2006 No. 03-03-04/1/380), if the taxpayer is included in the register of creditors of the organization, declared bankrupt, the debt of this organization cannot be considered uncollectible until the completion of bankruptcy proceedings (regardless of the expiration of the statute of limitations). After all, the exclusion of an inactive legal entity from the Unified State Register of Legal Entities can be appealed by creditors (other persons whose rights and legitimate interests were affected) within a year when they learned or should have learned about the violation of their rights (see also the letter of the Ministry of Finance dated July 27, 2005 No. 03-01-10/6-347).

The courts come to the conclusion that it is justified for an organization to write off receivables on the basis of a notice from the bankruptcy trustee of the debtor company that the debt has been recognized and is subject to repayment due to insufficient property (Resolution of the Federal Antimonopoly Service of the Moscow District dated October 30, 2006 No. KA-A40/10602 -06). Or on the basis of an arbitration court ruling on the completion of bankruptcy proceedings against a bankrupt debtor even before making an entry about the liquidation of the debtor in the Unified State Register of Legal Entities (Resolution of the Federal Antimonopoly Service of the Moscow District dated March 23, 2007 No. KA-A40/1194-07). After all, recognizing debts as bad on the basis of such a court ruling, and not on the basis of a document confirming the liquidation of the debtor, in itself also corresponds to paragraph 2 of Article 266 of the Tax Code.

Trust the bailiff?

Fiscal authorities have repeatedly stated that on the basis of the bailiff’s act on the impossibility of collection and the decision to complete the enforcement proceedings and return the writ of execution, the debt cannot be included in non-operating expenses. At the same time, the following compelling argument was given: after the end of enforcement proceedings, the bailiff does not draw conclusions about the reality or unreality of collecting the amount of receivables. He only states the impossibility of fulfilling the obligation at this point in time (letter of the Federal Tax Service for Moscow dated August 2, 2005 No. 20-12/54789, letter of the Ministry of Finance dated October 3, 2005 No. 03-03-04/1/242, letter MNS dated September 15, 2004 No. 02-5-10/53). But there are examples of court decisions confirming the “legitimacy” of a different approach.

Thus, the court indicated that when determining the possibility of including accounts receivable as part of non-operating expenses, it is necessary to take into account all the provisions of paragraph 2 of Article 265 of the Tax Code. In accordance with this paragraph, non-operating expenses include losses received by the taxpayer in the reporting (tax) period. At the same time, the list of losses, based on the design of this norm, is open. For the purposes of calculating income tax, amounts for which the legitimate possibility of collecting them has been lost can be taken into account as losses. And acts of impossibility of collection were issued by bailiffs due to the lack of information about the whereabouts of the debtor, the absence of property on his balance sheet or funds in bank accounts. They confirm the unreality of reimbursement of such amounts and, therefore, can serve as a basis for writing off receivables (Resolution of the Federal Antimonopoly Service of the Moscow District dated March 23, 2007 No. KA-A40/1194-07).

In another case, the court, making a decision in favor of the taxpayer, also proceeded from the fact that the reality of the execution of the judicial act is of decisive importance when classifying the amount of debt as bad debts. In addition to the acts issued by the bailiff on the termination of enforcement proceedings due to the debtor’s lack of funds in bank accounts (and property on the balance sheet), the applicant had no other legitimate methods for collecting the resulting amounts of debt. Although it cannot be ignored that when considering this dispute, the fact that there was no information about the debtor in the Unified State Register of Legal Entities at all (Resolution of the Federal Antimonopoly Service of the Moscow District dated April 18, 2006 No. KA-A40/2978-06) also played into the hands of the taxpayer.

Inna Danshina

a comment

Leading expert of the Center for Accounting and Tax Law “Consultant” Vadim Kulikov :

— An important question that does not have a clear answer in judicial practice is determining the moment when a debt is recognized as bad. According to the position of the Ministry of Finance (letter dated June 20, 2005 No. 03-03-04/1/9) and the Federal Tax Service for Moscow (letter dated August 21, 2006 No. 20-12/74624), the inclusion of bad debts in non-operating expenses made in the reporting (tax) period in which they were recognized as uncollectible.

However, the judicial practice of the FAS Moscow District is not so uniform. On the one hand, judges refer to the absence in the Tax Code of an indication of the period in which it is necessary to write off the debt. Consequently, the taxpayer has the right to write off losses in the form of bad debts as non-operating expenses in later tax periods if there are primary documents confirming the impossibility of collection. In this case, the write-off is carried out on the basis of the inventory data, written justification and order (instruction) of the head of the organization (Resolution of the Federal Antimonopoly Service of the Moscow District dated December 13, 2006 No. KA-A40/12137-06).

At the same time, in resolution dated August 16, 2006 No. KA-A40/7100-06-B, the FAS of the Moscow District came to the conclusion that losses in the form of amounts of bad debts are included in non-operating expenses precisely in the reporting (tax) period in which when they are recognized as hopeless, that is, when the taxpayer has the right to write off. The order of the head of the organization to write off receivables must also be issued by the head in the period in which the right to write off the debt arose.

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Bad debt requirements

Let us outline the key conditions in accordance with the Tax Code of the Russian Federation.

IMPORTANT!

Similar conditions for recognizing debt as bad in accounting are not established at the legislative level. The regulations contain a reservation only regarding the limitation period. But for work it is advisable to use a tax list of conditions. It is important for an organization to establish the conditions and procedure for recognizing bad debts in its accounting policies.

The creditor has a court decision to refuse to collect the debt

At first glance, it may seem that the presence of a court decision to refuse to collect a debt is an indisputable basis for recognizing a debt as uncollectible. However, the Ministry of Finance thinks differently. Officials believe that paragraph 2 of Article 266 of the Tax Code of the Russian Federation contains a closed list of cases when debts of debtors are hopeless. Since the presence of such a court decision is not mentioned in it, the creditor does not have the right to write off the debt before the expiration of the limitation period (letter dated July 22, 2016 No. 03-03-06/1/42962; “Receivables cannot be considered uncollectible if the court has made a decision to refuse in debt collection"). Let us add that the opposite situation cannot be ruled out: the court made a decision to collect the debt, but the statute of limitations has already expired, and the creditor has not yet received the money. Officials insist that in this case, writing off the debt will be illegal. This is explained by the fact that, according to Article 195 of the Civil Code of the Russian Federation, the limitation period is understood as the period for protecting the right in a claim of a person whose rights have been violated. And since the creditor has already gone to court, his right to defense has been used. As a result, it is impossible to write off debts due to the expiration of the statute of limitations.

Under such circumstances, it will be possible to recognize the “debtor” as hopeless after the bailiff issues a decision to end the enforcement proceedings. Another option is possible - to write off debts after the liquidation of the debtor company (letter of the Ministry of Finance of Russia dated May 29, 2013 No. 03-03-06/1/19566; “Debt for which there is a court decision on collection cannot be written off on the basis of the expiration of the claim period prescription").

What debts cannot be considered bad

In addition to the conditions for recognizing receivables as uncollectible, the Federal Tax Service has outlined a number of additional rules. If they are not observed, then the debt cannot be taken into account as a bad debt. This means that it cannot be counted as an expense for tax purposes.

If inspectors identify improperly written off arrears, the company will face sanctions. Firstly, tax authorities will restore the income tax base or simplified tax system to 15%. And, of course, additional tax will be charged on the restored amount. Secondly, the company faces a fine of 20% of the underpaid tax amount. Thirdly, penalties. Well, for dessert: if the Federal Tax Service admits that the taxpayer deliberately underestimated the base, then the amount of the fine will double - 40% of the debt.

The following cannot be classified as bad debts:

1. Not documented. Moreover, a supply agreement alone is not enough. Invoices, certificates of completed work, payment slips and checks are required. That is, documents confirming that the debt exists.
2. Related to the sale of goods, works or services. For example, arrears arising from securities or from the assignment of rights are quite difficult to offset. Such an operation requires a written explanation from the Federal Tax Service. But over time, controllers became more loyal to such debts.
3. Needed to be collected. If the creditor has not taken any action to get his money or assets back, then such a delay cannot be recognized in tax accounting.
4. Pardoned by settlement agreement. If the creditor forgave the debt or received at least something in return and a settlement agreement was concluded about this, then the delay cannot be considered hopeless.
5. They have a guarantee. Obligations with a guarantee cannot be considered hopeless. If the main debtor is unable to pay, then collection should be directed to the guarantors.
6. They are in solidarity. This means that the obligations under the contract are divided between several persons, without singling out the main debtor. Then the delay cannot be recognized as hopeless until at least one defendant has the opportunity to pay the bills.

All cases are individual. It is necessary to approach the issue of debt write-off thoroughly. Establish the procedure for recognizing debt as uncollectible in your accounting policies.

The procedure for writing off bad receivables

Bad debts in accounting are removed independently from each other on each item. According to the PBU, all arrears that cannot be collected are written off for each circumstance after an inventory has been taken, by the decision of the manager and with written justification. In this case, the amount is taken into account when calculating the company’s financial result. Simply put, it is recorded as a loss.

1. To determine the number and size of non-payments, conduct a regular inventory. It is based on its results that it is determined what amount is impossible to recover. Before drawing up the annual balance sheet, the inventory is compiled as of December 31. reporting year. In addition, it must be carried out when there is a change in the financially responsible person, in the event of a natural disaster or fire, and during the reorganization or liquidation of the enterprise. Except in mandatory cases, management has the right to conduct control at its own discretion.
2. Write it off in the tax period in which the debt arose. At other times it will be illegal.
3. Use the reserve for doubtful debts for this purpose. Make an entry Dt 63 Kt 62 (76 and other accounts). The amount of the reserve is regulated and cannot be more than 10% of revenue for the year. If its value is not enough, assign the uncovered part of the debt to unrealized expenses, record this: Dt 91.2 CT 62.
4. In the absence of a reserve, use the item of unrealized income: Dt 91.2 Kt 62.
5. Keep the documents recording the grounds for at least 5 years. Keep records of counterparties according to the balance on account 007.

The main benefit for the organization is the reduction of income tax. However, in tax and accounting, writing off bad receivables has its own characteristics, and this must be kept in mind when formalizing this process.

For accounting write-off, the following documents are required:

1. papers informing about the results of the inventory;
2. an order from the director of the company in any form containing the necessary justification;
3. accounting certificate confirming the transaction.

How to complete the operation

Any accounting transaction must have documentary evidence. Writing off hopeless overdue payments is no exception. But what documents should be used to document the situation? We follow the instructions:

1. Prepare documentation confirming the actual existence of the debt. This is a supply or contract agreement. We also need acts of completion of work, delivery notes, invoices, payment orders for the transfer of advance payments, and bank account statements.
2. Now prepare forms confirming the grounds for write-off. These may be acts of reconciliation, an order to liquidate a company, a court decision on bankruptcy, an extract from a bailiff on the termination of enforcement proceedings and other certificates.
3. Based on the collected documents, prepare an order to write off the bad debt. A sample is shown in the illustration.
4. Reflect the transaction in accounting and tax accounting. Draw up an accounting statement or other accounting form provided for by the accounting policies.

Sample order to write off irrevocable debt

Doubtful and bad debts

Accounts receivable may be normal or they may be bad. However, there is also the concept of dubious “receivables”. The criteria for classifying funds diverted from a company's turnover into this category are defined in tax and accounting legislation.

Tax accounting

Debt may arise:

1. In connection with the sale of goods (services, works). The Ministry of Finance believes that the following cannot be classified as doubtful debt: for advances to suppliers; on fines for violation of the contract; on the amount of interest for the use of other people's money, collected in court; loans (letters No. 03-03-06/1/816 dated 08/12/11, No. 03-03-06/1/308 dated 15/06/12, No. 03-03-06/1/ 29315 dated 07/24/13, No. 03-03-06/1/70 dated 02/04/11).
2. If the repayment period under the contract has expired. If the contract does not indicate a period or the contract was not concluded in writing, the date is determined on the basis of legislation, the regulatory framework, customs of business life, the essence of the obligations, and other conditions (Civil Code of the Russian Federation, Articles 486-1, 314-2).
3. The “receivable” has no security (bank guarantee, surety, pledge).

Accounting

According to Order No. 34n (Regulations on accounting and reporting dated 07/29/98), any unsecured debt can be considered doubtful, regardless of its nature, if its repayment period has expired or is close to expiration.

Doubtful and hopeless

It is a mistake to equate between doubtful and hopeless “debts”. In the first case, as follows from the listed conditions, the debt can still be returned to the company’s turnover. If the deadline is missed, the debt becomes uncollectible or hopeless.

According to the Tax Code of the Russian Federation, receivables are recognized as uncollectible if at least one of the following conditions is met (Tax Code of the Russian Federation, Article 266-2):

• the statute of limitations on this debt has expired;
• the debtor organization is liquidated or, according to an act of a government agency, cannot fulfill its obligations;
• bankruptcy of a debtor-individual (in accordance with the norms of Federal Law No. 127 of 10/26/02 “On Bankruptcy”, valid from 01/01/18);
• The bailiffs returned the writ of execution to the debtor, unable to collect the debt.

The latter may occur if the location of the debtor is not established by the bailiffs or they do not have information about the amount of property with which the debt can be repaid, or the debtor does not have property that can be foreclosed on.

A debt that is unrealistic for collection on several grounds at once will be considered as such already in the period when the first of them arises (Ministry of Finance, letter No. 03-03-06/1/373 dated 22/06/11).

The most common reasons for bad accounts receivable are liquidation of the debtor and the expiration of the statute of limitations. An organization is considered liquidated if it is excluded from the Unified State Register of Legal Entities. The limitation period is generally determined as three years (under Article 196 of the Civil Code of the Russian Federation).

On a note! If it follows from the terms of the contract that payment must be made in installments, the deadline is set for each installment separately.

Accounting and tax accounting

When working with irrevocable overdue payments, it is important to take into account the opinion of officials about write-offs and reserves. If the company has a reserve for doubtful debts, the amount of bad debt is written off against this reserve. If the non-refundable delay is greater than the reserve, then the difference is taken into account as part of other expenses for taxation.

We described in the article “Reserves for doubtful debts in accounting” how a debt is recognized as doubtful and what are the rules for forming a reserve fund.

After the amount of the irrecoverable overdue amount is written off from the balance sheet accounts, it must be reflected on the balance sheet. For this purpose, account 007 “Debt of insolvent debtors written off at a loss” is used. It is mandatory to keep off-balance sheet accounting of written-off amounts in case the creditor restores its solvency and is able to pay. In this case, the income tax will have to be reinstated.

Let's consider the procedure for recording the main situations of writing off bad debts.

Reasons for paying attention to bad and doubtful debts

Every accountant should keep bad and doubtful debts under close control. The reasons for this attention are:

1. The formed debt raises doubts about the possibility of collection and falls into the category of hopeless, forming an increased receivable in the internal currency of the enterprise and leading to the unreliable formation of financial statements;
2. Accounts receivable that are doubtful for collection lead to the formation of reserves for doubtful debts within the company's account. For accounting purposes, the creation of such reserves is the responsibility of the enterprise. For tax services, the taxpayer has the right to form such reserves;
3. Uncollectible receivables must be written off in both accounting and tax reporting.

Goods, work or services not paid for by the buyer

The seller will have to write off the entire debt amount along with the amount of value added tax. It is impossible to claim VAT for deduction in such a situation. We reflect transactions in accounting:

How to write off a bad receivable

The method of recognizing income and expenses on the date of shipment assumes that the shipment is taken into account in calculations for income tax, it turned out to be impossible to receive payment for it, so an amount has arisen to be written off.

A company can reduce its losses in two ways:

• by directly writing off bad debts as losses;
• through the reserve for doubtful debts.

When creating a reserve, you should rely on the provisions of Art. 266 Tax Code of the Russian Federation. The creation of a reserve for doubtful debts is reflected in the company's accounting policies. Its provisions must not contradict the Tax Code.

Deductions are recognized as non-operating expenses and are taken into account on the last day of the reporting (tax) period. If the volume of the created reserve is insufficient to cover the bad debt, the remaining amount is written off directly through non-operating expenses. It is recognized as a loss in NU at the moment when the debt is documented and recognized as uncollectible.

As noted earlier, reserves can be created only for operations of a sales nature.

If a company has created a reserve for doubtful debts, it can also be used to write off bad advances, as well as prepayment amounts. Ministry of Finance on the basis of Art. 266-2 of the Tax Code of the Russian Federation recognizes such a right for the taxpayer (letter No. 03-03-06/2/1551 dated 16/01/18). It is advisable to consider the moment of writing off a hopeless “receivable” as the last day of the period in which it was recognized as such (Tax Code of the Russian Federation, Article 272-7).

Bad receivables not reflected in accounting on time must be included in the declaration strictly according to the period when the debt arose, i.e. changes need to be made to the document. The Ministry of Finance thinks so. At the same time, court practice recognizes the right of the taxpayer on the basis of the Tax Code of the Russian Federation, Art. 54-1, to reflect the uncollectible “receivable” in a later period, if the income tax was overpaid earlier (the Supreme Court of the Russian Federation, definition No. 305-KG17-14988 of 01/19/18 and a number of others).

On a note! If there is a counter debt and the bad debtor is also a creditor of the organization, the position on the issue of recognition of such debt in the accounting of the judicial authorities and the Ministry of Finance differs. Courts have held that regardless of whether a firm chooses to set off or not, bad receivables must still be recognized as such. After all, according to the norms of the Civil Code, a company has the right to set off, but is not obliged to make it. The Ministry of Finance strictly adheres to the position that first it is necessary to offset, and then only recognize the uncollectible “debt” (letter No. 03-03-06/1/620 dated 04/10/11). The final decision rests with the organization.

Advance payment to supplier without subsequent shipment

Sanctions for violation of contract terms

Accounting entries for debt recovery

When funds are received to repay doubtful debts, the amounts are written off from off-balance sheet accounting and taken into account in the corresponding balance sheet accounts for accounting for settlements. The balance sheet records entries that are “reverse” to those entries that were used when writing off receivables from the balance sheet (letter of the Ministry of Finance of Russia dated February 11, 2016 No. 02-07-10/7306).

More on the topic: Form 0503769 in 2021: fill it out correctly

Example. The institution's commission decided to write off doubtful receivables for prepayment for materials from the balance sheet to the off-balance sheet to monitor the possibility of collection. The debtor's property status has changed and funds to repay receivables have been transferred to the personal account.

Decrease in off-balance sheet account 04 – debt is written off from off-balance sheet accounting;

Debit KRB 2,206 34,564 Credit KRB 2,401 20,273 – the debt was accepted onto the balance sheet.