Bad debt is a loan that is unable to be repaid by the customer. Since not all consumers are able to pay their debt in full, it is usual and expected for companies that give loans or credit to do so.

This is the estimated uncollectable amount from the customers based on the aging report or the percentage sales method. The organization can analyze consumers' debt-repayment patterns using the aging report.

There may be a variation between this estimate and the real bad debt amount because this is only an estimate. If the actual bad debt exceeds the allowance for doubtful debt, the bad debt expenditure must be recorded on the income statement within the same accounting period as the loan or credit.

DR BAD DEBT EXPENSE

CR PROVISION FOR DOUBTFUL DEBT

DR PROVISION FOR DOUBTFUL DEBT

CR RECEIVABLE

It is based on the prudence concept. If a company discovers that the net benefit of a financial instrument has diminished, the financial instrument should be written off as a loss.
IFRS 9 requires a company to recognize the impairment of financial assets in the amount of Expected Credit Loss (ECL). 

There are 3 stages of financial asset to recognize the impairment loss.

Since the impairment loss is calculated at the lifetime ECL for all assets, the company does not need to determine the stage of a financial asset.

Items that are compulsory to apply a simplified approach:

• Trade receivable without significant financing component
• Contract assets under IFRS15 without a significant financing component

Section 34 (2) of the Income Tax Act, 1967 (ITA) allows a trade debt that is fairly considered bad debt to be subtracted from gross income when calculating a business's adjusted income.

To be eligible for a tax deduction, the decision must be based on valid commercial considerations rather than personal, private, or other factors. It should be regarded as a fair foundation if it can be demonstrated that the cost of legal action will be exorbitant in comparison to the amount owed.

To qualify for a deduction for tax purposes, there should also be evidence to show:

a. each debt has been reviewed independently;

b. how the level of its doubtfulness was assessed;

c. when and by whom this assessment was made. 

Specific provision for doubtful debts is tax deductible whereby each debt is evaluated separately. 

To qualify for a deduction for tax purposes, there should be evidence to show:

a. each debt has been reviewed independently;

b. how the level of its doubtfulness was assessed;

c. when and by whom this assessment was made; and

d. what specific information was used in making that assessment. 

1. General provision for doubtful debt
2. Forgiving or waiving payment of debt 
3. Non-trade debt