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Receivables and bad debts: what goes on the balance sheet?
In this article
Receivables are the customers who still owe you money. They appear on the balance sheet at the amount you invoiced. As long as everyone pays, that is an honest picture. Once an invoice stops coming in, your balance sheet no longer adds up.
Why you have to do something about it
A receivable you will never collect is not an asset. If you leave it there, your profit is too high and your equity is too high. You only notice that when you want to borrow or sell your business — and then your equity turns out to be worth less than you thought.
Three routes
| Route | When | What it does |
|---|---|---|
| Write off | The receivable is definitively uncollectible: bankruptcy, no recovery possible, customer has disappeared. | The receivable leaves the balance sheet and the amount is an expense in the profit and loss account. |
| Provide | It is probable that you will receive nothing, but you do not yet know how much or when. | You leave the receivable and set a provision against it; the balance falls. |
| Do nothing | The customer is only somewhat late. | Nothing changes. Keep an eye on it, because an invoice that is six months overdue is rarely paid. |
Better to write off than to let it simmer
If an uncollectible invoice stays on the balance sheet for years, you are hiding a loss in a year in which you thought you were making a profit.A provision: what to watch for
A provision is not a general pot for "customers might not pay". You substantiate it per receivable or per clear group: this customer is bankrupt, this receivable is disputed, this invoice is more than a year old and there has been no contact. Record that substantiation — it is the first thing asked about in an audit.
The glossary states what exactly distinguishes a provision from a liability.
What is and is not allowed for tax purposes
Writing off a concrete, demonstrably uncollectible receivable is generally deductible. A general provision — a percentage of your entire receivables portfolio because "something always goes wrong" — usually is not. So your figures can differ between tax and commercial accounting here, and that difference belongs in the reconciliation between your result and your taxable profit.
How that works is explained in the difference between the annual accounts and the tax return.
What do you put in the notes?
How you enter this yourself is explained in preparing your own annual accounts.
- The total of the receivables and, where relevant, the ageing split.
- Which receivables you have written off, and why.
- Which provision you have formed and how you determined the amount.
- A receivable you still collect after writing it off? That is income in the year of receipt.
Frequently asked questions
When is a receivable uncollectible?
Can I form a provision for bad debts?
I have already paid the VAT. Do I get it back?
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Read more about this topic.
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