How can losses on accounts receivable be integrated into your accounting? There is a distinction between definite losses and unconfirmed losses. Here is an explanation.
In practice, invoices are rarely settled within the specified timeframe. There are even situations when a company has to write off what it is owed—when a client goes bankrupt, for example. From an accounting point of view, these losses on accounts receivable are handled differently depending on whether it is a definite loss or an unconfirmed loss.
- If the loss is definite, the corresponding amount is amortized directly from the items posted under accounts receivable to a special appropriation account: “losses on accounts receivable”.
- If the payment is simply uncertain, you should estimate the risk of loss at the end of the year and amortize this directly in the contingency account and/or the losses on accounts receivable.
The contingency account is an allowance account for estimated payment defaults. The tax authorities allow an official flat-rate del credere of 5% of the amount posted under accounts receivable (i.e. invoices still to be paid) for debtors in the same country, and 10% for foreign accounts receivable. In practice, the tax authorities in the majority of cantons grant 10% on all accounts receivable posts.