Accountant, of Law Company “NOBILI”

Daria Paliura

What should an accountant do when your counterparty is bankrupt?

Your business has been notified that the counterparty has been declared bankrupt. Do you have to write off the amount of this debt? To answer this question * Daria Palyura * gathered information and made a list of important aspects that an accountant should pay attention to if your company’s counterparty is declared bankrupt:

1. A document confirming the status of bankrupt.

2. Accounting:
2.1. If the debt is written off at the expense of the provision for doubtful debts -it must be excluded from the assets of the enterprise and at the same time reduce the amount of the reserve (Dt 38, Kt 361). If the amount of the reserve is insufficient, the debt is written off to Other operating expenses (Dt 944, Kt 361);
2.2. In the current activity there is also a need to write off bad debts: Dt 944, Kt 371 (377);
2.3. Write-off receivables are recorded on off-balance sheet account 071 “Write-off receivables” for at least three years from the date of write-off.

3. Tax accounting:
3.1. The company does not apply tax differences – write-off of bad debts from the reserve does not affect tax accounting;

3.2. The company determines the tax differences, so the financial result is increased: by the amount of costs for the formation of the reserve; for the amount of expenses from the write-off of debts in excess of the reserve (Article 139.2.1. TCU)

3.3. The company determines the tax differences, so the financial result is reduced: by the amount of adjustment (reduction) of the provision for doubtful debts (Article 139.2.2. TCU).

Write off debts correctly!