What Is Bad Debt In Singapore? A Deep Dive Into Credit Challenges
August 21, 2023
Any firm that extends credit to its clients faces the risk of bad debt, which can profoundly affect its bottom line. Business operations can streamline, and severe financial losses mitigated if the company provides for such contingencies.
But what exactly do we mean by bad debt? Keep reading to find out what is bad debt, examples, and how to deal with bad debt in Singapore.
Bad Debt: Definition
Bad debt definition is monetary obligations owing to a company or corporation deemed improbable to be repaid. It is an indication of a company’s unpaid balances regarded as being uncollectible. In credit institutions, it happens when customers fail to make timely payments.
Suppose a corporation extends credit to a client for purchasing its products and said consumer fails to fulfil their payment obligations per the agreed-upon terms. In that case, the transaction falls under irrecoverable debts after reasonably attempting to collect the outstanding balances.
Customers might not make payment of money owed to a company due to financial crisis impact, bankruptcy, or negligence in payments.
Bad Debt Example
SG Ltd., a retail establishment, sells merchandise valued at $10,000 to XYZ, a customer, through a credit transaction. XYZ has filed for bankruptcy under insolvency issues. Thus, they will unlikely pay the debt. XYZ’s outstanding $10,000 owed to SG Ltd. will now be a defaulted debt.
Accounting’s Bad Debt
The defaulted debt contingency account is a contra-asset item. Methods to record bad debt in Singapore include:
Methods To Record Bad Debts In Singapore
To document money unlikely refundable money in the financial records, companies must initially assess the potential losses they may incur. This particular estimation is a bad debt provision, reserve, or allowance.
The allocation for uncertain payments is the contra-asset entry on the financial statement.
Write-Off Of Bad Debts
Many Singaporean small enterprises employing International Financial Reporting Standards (IFRS) may opt for a bad debt write-off approach. Debt is immediately documented in the records once it’s determined that a receivable is hopeless. The amount is deductible from the total accounts receivable.
When the bad debt amounts exceed bad debt provision, the difference comes up as an expenditure in the relevant financial year’s income statement. As a result, the company’s net profits for that specific accounting year reduce.
GST Bad Debts Relief
In Singapore, companies can recover debt by reclaiming GST paid to non-performing accounts. The Inland Revenue Authority of Singapore (IRAS) provides a relief scheme for over six months old invoices, subject to specific circumstances.
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Accounting Entry For Bad Debt
To recognise this expenditure, the company must execute an accounting transaction to represent the incurred loss accurately. Accounting entry for bad debt entails a debit to the expenditure account and a credit to the contra-asset account.
A bad debt status is only assigned to the account when a corporation believes it cannot collect the outstanding amounts owed and remove it from its financial records. The transaction involves debiting the ‘allowance for dubious accounts’ and crediting the ‘accounts receivable.’
Suppose settlement is ultimately received for previously written-off bad debts. The said amounts will be duly documented in the recovery account. In an alternative approach, companies in Singapore can revert the initial transaction when writing off a noncollectable debt, afterwards recording the receipt of payment.
Estimation Of Bad Debt Expenditure
Following the ‘matching’ accounting principle, enterprises must estimate their debt charges throughout the fiscal year during credit sales.
The measure of poor debt allocation is possible using the following two different approaches as per Singapore’s financial practices:
In the percentage sales method, the debt estimation is generated using historical data as a foundation, and a constant proportion applicable to total sales.
As an illustration, historical patterns indicate that 3% of a company’s sales are often uncollectible, given sales amounting to $100,000. The estimated debt for the year would be $3,000.
Likewise, if sales reach $150,000, a company incurs a bad debt expenditure of $4,500 in the year in question. The provision for doubtful accounts will reflect a combined balance of $7,500 for the two reporting times.
Accounts Receivable Ageing Method
Here the company will add up all of its aged accounts receivable to determine the total amount likely to be uncollectible. Next, it will calculate percentages of delinquent debt for each age range based on norms and statistics from the sector.
As accounts receivables mature, default risk increases and collections decline. Dun and Bradstreet say the collection rate is 69.6% for accounts receivable older than 90 days. After six months, this percentage reduces until 52.1%; after a year, it is 22.8%.
Consider the hypothetical case of SG Ltd., which has $50,000 and $30,000 in accounts receivable. These are overdue by less than 30 and 60 days.
According to past performance, the company should expect to write off 1% of outstanding accounts after 30 days and 5% after 60 days. So, here is how we’ll calculate the defaulted debt cost:
Defaulted debt expense = ($50,000 x 1%) + ($30,000 x 5%)
Defaulted debt expense = $500 + $150 = $650
This figure, however, reduces after estimating the debts for the following reporting period. For the next accounting period, only $340 ($650 minus $990) will fall under bad debt because the bad debt allowance was $990.
How Do You Deal With Defaulted Debt In Singapore
Even with precautions taken, thorough background checks performed, and credit limitations set, several invoices might still go unpaid. Here are some critical approaches to dealing with defaulted debt:
Collections can be faster by prompt follow-ups on overdue invoices with automated frequent reminders in regular phone calls or defaulting debt letters.
Debt Negotiation Strategies
You can speed up payments by providing payment schedules to consumers with financial troubles.
Engage The Services Of Debt Collectors
If you haven’t received payment after several warnings, contacting debt collection agencies in Singapore may be your best option. These organisations have the workforce and knowledge to pursue compensation from customers that have fallen behind.
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A corporation’s defaulted debt is the amount of money its customers owe the company but are highly unlikely to repay. Companies in Singapore account for the uncollectable payments that they will not be able to recover a debt by creating a bad debt provision.