Provisions for doubtful debts and worthless receivables
An uncollectable receivable does not become an expense by itself. Both making a provision and writing off a receivable have statutory conditions; an entry made before they are met invites challenge.
Failure to collect a trade receivable reduces profit in fact. But for it to be deducted from the tax base, the conditions set out in the Tax Procedure Law must be met. The two concepts most often confused in practice are the doubtful debt provision and the worthless receivable.
Doubtful debt provision
Provided the receivable relates to earning commercial or agricultural income, a provision may be made for receivables at the litigation or enforcement stage, and for receivables too small to justify proceedings where the debtor has not paid despite a protest or a written demand made more than once.
| Condition | Explanation |
|---|---|
| Connection with income | The receivable must relate to earning commercial or agricultural income |
| Previously recognised | It must have been recorded as revenue earlier |
| Proceedings | It must be at the litigation or enforcement stage |
| Small receivables | Demanded twice by protest or in writing |
| Periodicity | The provision must be made in the period the condition arises |
Worthless receivables
A receivable that can no longer be collected according to a judicial decision or a convincing document is a worthless receivable. It is written off directly in the period it becomes worthless; no provision is required.
| Doubtful debt | Worthless receivable | |
|---|---|---|
| Situation | Collection is doubtful | Collection is no longer possible |
| Entry | A provision is made | Written off directly |
| Basis | Litigation, enforcement or two written demands | Judicial decision or convincing document |
| Later collection | Provision reversed, recognised as income | Recognised as income if collected |
Frequent mistakes
- Making a provision for every overdue receivable. Being overdue is not enough; proceedings are required.
- Making a provision for advances. No provision can be made for an amount not recognised as revenue.
- Including the secured portion where the receivable is covered by collateral.
- Reading the conditions loosely for receivables from related parties.
- Forgetting to recognise income when a provisioned receivable is later collected.
- Excluding VAT; where the whole receivable was included in revenue, the VAT element is also within scope.
The sound approach in practice: update the ageing table monthly, track receivables in proceedings separately, and record in writing at period end which receivable was provisioned, on what condition and for what amount. That record is the first document requested in an audit.
Legal basis
- Tax Procedure Law No. 213, Article 322 (worthless receivables)
- Tax Procedure Law No. 213, Article 323 (doubtful debts)
- Tax Procedure Law No. 213, Article 324 (waived receivables)
This article is general information and does not replace professional assessment of a specific matter. Amounts and rates relate to the stated year; please verify the current provisions before acting.
