#baddebts

[debtrec]

Bad and Doubtful Debts

Bad debts refer to amounts that are deemed unrecoverable, allowing businesses to claim deductions under specific criteria outlined in the Income Tax Act of 1961. Doubtful debts, with uncertain recovery prospects, are handled differently, often requiring provisions for potential losses. The recovery of bad debts, as well as provisions for doubtful debts, is subject to specific tax guidelines, particularly for banks and financial institutions, ensuring proper accounting and tax treatment for these financial challenges.

What are Bad Debts?

If corporate and professional debt becomes unrecoverable in the preceding fiscal year, a deduction is permissible. If the debts cannot be wholly or partially recovered by the loans provided by banks or money lending institutions, a deduction may be allowed.

Eligibility Criteria for Deduction of Bad Debts

The eligibility of an individual for a deduction is contingent upon the existence of debts that are entirely unrecoverable under the law or by the courts. The Income Tax Act of 1961, Section 36(2), must be satisfied prior to the provision of any relief for delinquent debts. The circumstances are as follows:

The debt or loan is required for the assessee’s trade or occupation and is required to be associated with the applicable accounting period. Any debt irrelevant to the assessee’s occupation or business does not qualify for a deduction.

In case a debt due from retiring partners is non-recoverable, the assessee cannot disregard it and can file for a claim for a deduction due to capital loss.

Only those debts acknowledged throughout the present period or any preceding fiscal year's tax return calculation are entitled to receive a deduction by the assessee. Attention should be paid to the amount that is loaned in the ordinary course of business at the lending institute.

The deduction for bad debts should have been made in the accounting year in which any loan, debt, or portion thereof was considered bad.

The assessee is only eligible to claim the deduction for debts that were previously eliminated from their accounts books in the previous fiscal year, for which the reduction is also requested.

What are Doubtful Debts?

Debt with uncertain chances of recovery is known as doubtful debt. Consequently, the company can endure losses because of the presence of these debts.

The sum payable to customers’ accounts is tracked somewhere at the end of the financial year, and the probability that some of those amounts will be recovered is estimated to be not possible. In reality, the total whose recovery is uncertain cannot be classified as a loss on the day the accounting information is generated and, as a result, cannot be written off. It is necessary to apply it to the company's profit and loss account, contingent upon its prior performance.

A clause titled "Provision for Doubtful Debts" is also included to safeguard against the potential loss. The clause imposes a tax on profit. When we establish provisions to mitigate potential losses in the event that the uncertain debt proves to be detrimental, a specific sum is allocated.

Bad Debts from Closed Businesses

Bad debts from a no longer active firm examined before the commencement of the financial year cannot be written off from the assesse’s profits from their continuous operations.

As per Section 36(2)(iii), in case the bad debts have been removed from the accounts book but remain recoverable, A.O. declines to acknowledge them as a deduction. In the year when a debt or part of an obligation becomes unrecoverable, it should be subtracted from income.

 How the Bad Debts are recovered?

In case the debt was classified as bad debt in the previous year and the necessary deduction was also accounted for. Nevertheless, the debt was subsequently recovered in whole or in part. The amount that was eventually recovered will be included in the income for the fiscal period in which it was recovered. Suppose that the assessee wrote off a portion of the debt in a previous year, the Assessing Officer approved the deduction, and the creditors subsequently repaid a portion of the debt. In that event, the recovered funds will be regarded as a standard realization of debts. If the amount recovered is less than the expected amount, the remaining balance will be considered bad debts.

Provision for doubtful and bad debts

The Income Tax Act of 1961, section 36(1) (viia), allows only banks and financial institutions to deduct expenses associated with provisions for poor and dubious loans. The deduction for the provisioning of problematic debts is not available to any other taxpayer.

The deduction that banks and other financial institutions may make is subject to the following restrictions:

Bank Types include Indian Banks, Foreign Banks, Public Financial Institutions and State Financial Corporations.

7.5% of the adjusted overall revenue plus 10% of the average total advances of rural branches

An adjusted 5% of the total income

An adjusted 5% of the total income Compute the advancements of each rural branch independently.

Divide the number of months outstanding by the average advances by branch.

The average total amount of advances made by each branch.

Treatment in accordance with the accounting standard

In accordance with Accounting Standard 29, "Provisions, Contingent Liabilities and Assets," the provisions that arise in the ordinary course of business must be recorded. The provisions are occasionally disallowed by the Income Tax Department, which leads to a temporal discrepancy between the accounting records and the accounts required by the I.T. Act.

Consequently, an assessee is also required to establish the requisite Deferred Tax Assets and Liabilities. For an assessee to have a deferred income tax asset or obligation, only the temporal mismatch of a transient transaction that has the potential to be undone in the future is necessary.

Conclusion

In conclusion, bad and doubtful debts are critical components of business accounting, with specific provisions for deduction under the Income Tax Act of 1961. While only banks and financial institutions can claim provisions for such debts, careful adherence to tax rules and accounting standards ensures proper financial management and tax compliance.

[connollytim32]

Good Debt vs. Bad Debt: Helping Kids Differentiate Between the Two

Teaching kids about money early is crucial. Help them understand the difference between good debt, like student loans or mortgages that build value, and bad debt, like high-interest credit cards. Use examples they can relate to and consider reading the Good Debt Bad Debt book together for a deeper, age-appropriate explanation of smart financial habits.

[acuiti]

Tackle Bad Debt with SAP: Smarter Debt Management for Utilities & Telecom

Discover how SAP’s analytics-driven debt management solutions help utilities and telecom companies cut bad debt, enhance customer experience, and streamline collections. 

[cpapartners]

How to Use Good Debt (While Identifying and Avoiding Bad Debt)

Not all debt is bad, but knowing the difference between good debt and bad debt and how to use them can help you get ahead financially and stay ahead.

[technology098]

Exploring Current Expected Credit Loss solutions, transforming financial accounting by predicting credit losses, adhering to FASB standards

[wagonslearning]

Lending institutions are facing the heat with many accounts turning into Non-Performing Assets (NPA) post-pandemic. The difficulty in money recovery and uncertain cash flow is a huge deterrent to financing companies and banks in India, affecting balance sheets and bottom lines.

One of the major roadblocks in the process of debt recovery is the absence of deep collaboration between the borrower, & the collection & recovery teams

Enroll with Wagons Credit Collection and Recovery Skills Program, and learn about effective communication for result-oriented engagement and different ways to implement variation in relationship styles based on customer cohorts.

Program timings :- 

06th Nov | 6 hours | 10am-1pm, 2pm-5pm

13th Nov | 6 hours | 10am-1pm, 2pm-5pm

20th Nov | 6 hours | 10am-1pm, 2pm-5pm

27th Nov | 6 hours | 10am-1pm, 2pm-5pm

Click on the link below to register 🔗

https://wagonseducation.com/home/course/credit-collection-and-recovery-skills-level-2/102

For more information visit:

https://www.wagonslearning.com/

[gauravdwivedy]

Ex-RBI governors warn of NPAs delaying recovery - Times of India

MUMBAI: Domestic banks, which have the highest bad loan pile in the world, pose a huge risk to the recovery of the pandemic-ravaged economy unless the government rescues them, four former Reserve Bank governors warn in a soon-to-be-released book. While Raghuram Rajan blames excessive investments by companies and the exuberance of bankers, coupled with inability to act fast as the prime causes for NPAs (Non-Performing Assets), Yaga Venugopal Reddy opines that the bad loans are not only a problem but a consequence of other problems. Duvvuri Subbarao sees NPAs as a big and real problem that needs to be contained, and Chakravarthy Rangarajan blames the lingering real sector problems, partly policy-driven most recently seen with demonetisation, aggravated the crisis. "Yes, the bad loan problem is big and real," says Subbarao, who was the governor for five years from September 2008 to September 2013, in the book by senior journalist Tamal Bandyopadhyay titled 'Pandemonium: The Great Indian Banking Tragedy'. The author has interviewed the four former governors for the book that will soon be launched by Roli Books. And all of them say what is also big and real is the fiscal constraints of the government, pointing to its very weak finances crippled by the pandemic. State-run banks are in bad shape despite getting Rs 2.6 lakh crore in fresh capital in the past few years alone. Read the full article

[seoservice321-blog]

WHY TO CALCULATE BAD DEBT EXPENSE OF YEAR?

[elliottfinancialconsultants]

Not all debt is equal. Some types of debt are more harmful to your financial security than others. Often, we associate debt with poor financial decisions that hurt your financial plan. But there’s such a thing as good debt and bad debt. Having a financial coach can help you make better financial decisions by showing you how to tell the difference between the two and how to tackle them. If you’re unsure about how to approach your debt (good or bad) you don’t have to tackle it alone. Call Wayne Elliott at 519-220-0557 for a strategy that may help benefit you in the long term and make sense of your financial picture. http://bit.ly/35fI6PN

[technology098]

Exploring Current Expected Credit Loss Solutions & Their Impact on Standards

The development of Current Expected Credit Loss (CECL) solutions is underway to address the requirements of a new accounting standard set forth by the Financial Accounting Standards Board (FASB). This standard aims to facilitate the rapid calculation of estimated future credit losses throughout the lifespan of various financial instruments such as loans, debt securities, trade receivables, and purchased credit deteriorated (PCD) assets.

Previously, financial institutions (FIs) relied on traditional methods that primarily focused on incurred losses, marking loans as impaired only when they were deemed unrecoverable. These losses were then accounted for as expenses within the allowance for loan and lease losses (ALLL). Additionally, the determination of bad debts by FIs was often based on previous year's losses, with the same amount earmarked for potential credit impairment in the subsequent year.

However, the updated guidance from FASB mandates a shift towards incorporating predictive information into the calculation of bad debt. This necessitates the implementation of the CECL model, which enables companies to anticipate and account for potential credit losses more effectively. By doing so, FIs can address the inherent delay in recognizing credit losses across all financial assets.

The CECL model fundamentally requires organizations to take a proactive approach in assessing their exposure to credit losses. Rather than relying solely on historical data, companies must now factor in forward-looking information to better anticipate potential losses and subsequently adjust their financial records accordingly. This entails recording impairment, thereby deducting from revenues to reflect the impact of these anticipated losses.

By embracing the CECL model, FIs can enhance their risk management practices by gaining deeper insights into the potential credit risks associated with their portfolios. This proactive approach enables institutions to allocate appropriate reserves for expected credit losses, thereby strengthening their financial position and resilience against economic downturns or unforeseen events.

Furthermore, the Current Expected Credit Loss model encourages greater transparency and accountability in financial reporting. By requiring companies to incorporate forward-looking information into their calculations, stakeholders are provided with a more comprehensive understanding of the potential risks and uncertainties inherent within the institution's financial statements.

Implementing CECL solutions involves leveraging advanced analytical tools and methodologies to effectively model and predict future credit losses. This may include the utilization of statistical techniques, machine learning algorithms, and scenario analysis to assess various factors that could impact creditworthiness and repayment abilities.

Moreover, the adoption of CECL solutions necessitates a collaborative effort across different functional areas within an organization, including finance, risk management, and IT. By fostering cross-functional collaboration, companies can ensure the successful integration of CECL methodologies into their existing processes and systems.

Despite the benefits offered by CECL solutions, their implementation may pose certain challenges for FIs. These challenges may include data availability and quality issues, complexity in modeling forward-looking information, and the need for ongoing monitoring and validation of CECL models to ensure their accuracy and effectiveness.

In conclusion, the development and adoption of Current Expected Credit Loss solutions represent a significant evolution in credit risk management practices within the financial industry. By incorporating forward-looking information into the calculation of expected credit losses, FIs can better anticipate and prepare for potential risks, thereby enhancing their resilience and ability to navigate uncertain economic environments.

[linernotesandseasons]

“Are you with me now? Working like a mule / I’m pulling slow, on a rain black road / with a load I can barely feel / if you could come to me / if you could take away my mind / if you could fill me up, like an empty cup / that would be fine… No turquoise jewellery no / don’t bury me in silver, don’t bury me in gold / when I die, the earth as my bride / give me a dark & shady home… So are you with me now? Working like a mule / eventually, I’ll be set free / & that will be fine…” • Night one of three. Hiss in Colorado. Here’s hoping for deep cuts & hits, two hour sets, and some songs about rivers & spirits & children. Hiss Hallelujah hum golden messenger magic against the madness & darkness… Eventually, I’ll be set free. And that will be fine… • #thecalmbeforethestorm #hiss #balthazar #baddebt (at Washington's FoCo) https://www.instagram.com/p/CaqfGD-MDE1/?utm_medium=tumblr

[raxsonic]

The Supplier Squeeze Does your business have a scenario where... https://www.raxsonic.com/sys/the-supplier-squeeze/?feed_id=139&_unique_id=609408847edda&utm_source=Tumblr&utm_medium=erikvs68&utm_campaign=FS%20Poster #baddebt #change #suppliersqueeze