What is Bad Debt Reserve?

Bad debt reserve refers to the taxpayer withdraws a reserve based on a certain percentage of the balance of accounts receivable at the end of the year, which is used to write off the bad debt losses of its accounts receivable.

Provision for bad debts

allowance for bad debt;

allowance for doubtful accounts;

reserve for bad deb;

Provisions for douvtful debts.

Taxpayer

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According to the provisions of the current financial accounting system:

The enterprise should conduct a comprehensive inspection of the receivables regularly or at the end of each year. It is expected that bad debts of various receivables may occur. For receivables that are not sure that they can be recovered, provision for bad debts should be made. The following four situations generally stipulate that the provision for bad debts cannot be made in full: (1) receivables that occurred in the current year; (2) plans to restructure corresponding receivables; (3) receivables that occur with related parties (4) Other receivables that are overdue but cannot be recovered without conclusive evidence. No provision for bad debts shall be made for the bills receivables held by the enterprise. And then make provision for bad debts according to regulations.

The method, scope and proportion of the provision for bad debts shall be determined in accordance with the management authority and relevant prescribed procedures.

Withdrawal formula is as follows:

Provision for bad debts that should be drawn for the current year = Calculated amount of bad debts that should be drawn for the current period based on accounts receivable-Credit balance of the subject

According to the provisions of National Tax Publication No. 200084:

For taxpayers approved to withdraw bad debt reserves, unless otherwise specified, the withdrawal ratio shall not exceed 5 of the balance of accounts receivable at the end of the year. Accounts receivable at the end of the year include the amount of notes receivable.

Gap analysis:

1. The withdrawal base is different. The tax law stipulates that the balance of accounts receivable at the end of the year includes the amount of bills receivable, and the tax law does not clearly explain the four situations in which the above accounting regulations do not allow full withdrawal of bad debt provisions; we can understand this except Except for the affiliated enterprises referred to in Article 3 below, bad debt provisions can be made for all accounts receivable in accordance with the provisions of the financial system;

2. Other accounting receivables (except for employee transactions) can also be used for bad debt provision, and the tax law stipulates that the debt receivable of non-purchasing and sales activities of the enterprise shall not withdraw bad debt provision;

3. According to the tax law, any accounts receivable between affiliated companies shall not be subject to bad debt provision, nor shall they be recognized as bad debt losses.