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How to post provision for doubtful debt

How to post provision for doubtful debt

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I am currently working on year end figs for a small community finance institution.  This entity makes loans to small businesses, and at present needs to make a provision for loans that it believes may not be repaid.  It also has within its reserves an amount of loan guarantee funding, which has been provided to underwrite the debt.  

My question is, if I enter a provision for the doubtful debt, do I also need to show that this is covered by the loan guarantee?

I would be really grateful if someone who has experience of this type of situation could please point me in the right direction.

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By pawncob
20th Mar 2014 11:13

Noted

A note to that effect is all that is required.

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By johngroganjga
20th Mar 2014 13:49

How does the entity access the funds under the guarantee when it suffers a bad debt?  And who decides when a debt is bad for that purpose?

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By TerryD
20th Mar 2014 17:59

On the face of it, you don't have a bad debt - you simply dip into the guarantee fund to settle the debt. However, this presupposes that the guarantee fund you have received is yours to do with as you please. But if, as John suggests, there are strings attaching to this guarantee funding, it might not be that simple. Is it refundable if not required? Are there hoops to be jumped through before utilising it?

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By njpandya
20th Mar 2014 19:55

ONNO!

This is the theoretical formula:

Old Bad debtsAdd: New bad debtsAdd: New RDD (Reserve for doubtful debts)Less: Old RDD (Reserve for doubtful debts)

If you are preparing management accounts you shall reflect them as a provisional figure but when it comes to statutory accounts note shall be suffice because HMRC won't allow any unnecessary hit against profits until they are actually not realised and satisfying sufficient efforts been made by the business and having a good reason.

 

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By TerryD
21st Mar 2014 11:14

What has HMRC to do with it?

The fact that an item in the P & L Account might be disallowable for tax has no bearing whatsoever on what goes in the statutory accounts. We don't know what sort of entity this is, but if it has to prepare "true and fair" accounts, then compliance with accounting standards is all that matters. The profit is then adjusted for tax disallowables, etc. in the tax computation.

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By johngroganjga
21st Mar 2014 11:17

Tail wagging dog

Agree with the above.  What goes in the accounts is none of HMRC's business.  The tail does not wag the dog.

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