Accounting Question : Provision for bad debts : bad debts : income tax?

Question

Provision for bad debts has been created at 50% of the outstanding debtors by debiting the Bad Debt A/c ( expense) and crediting Provsion for bad debt a/c. (liablilty) during 2006-07.
Is the above expense of Bad-debt allowable as a deduction from Business Income , while computing Income for Income tax purposes.
I await a prompt answer. thanks..........

Answer 1

Mere provision for bad debts is not deductable while computing the income as per the income tax Act.It has to be written off from the books of account to claim deduction.

Answer 2

Since the allowance is made at 50% of trade debtors, this is a general allowance and is not allowed as a tax deduction. In your tax computation you have to add this amount back to taxable income. Btw, note the preferred a/cg nomenclature - you make an allowance for a doubtful debt but you write off a bad debt. You don't make an allowance for a bad debt because the moment you know it's bad, it's to be written off.
And we don't say provision for doubtful debts anymore, we say allowance for doubtful debts because the word provision is defined in IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" and such provisions have a different meaning from an allowance.

Answer 3

I was just looking at Toyota's financials and they have a line called 'Provision for doubtful accounts and credit losses' on their cash flow page. It wouldn't be profit and loss because it's neither yet, it's just the bumper to absorb it in case it happens. Production wages would go on the Statement of Income, or Income Statement as part of Cost of Goods Sold. Bank charges? I don't know, maybe on the Statement of Income under 'Cost of Financing?' Not sure about that one. Haven't seen that specifically broken out so it is probably combined in a more general term.

Answer 4

High bad debts can only be allowed if you areable to prove that they are genuine bad debts and mere provisioning will not help ur case to claim such high bad debts