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How do I show money customers owe, bad debts and provisions?

Usually unpaid invoices, less bad debts.

At each year end, check for signs a customer will not pay in full; if so, cut the debt to the cash you expect. A "bad debt provision" reduces the debt and is not a provision.

Published

At a glance

Applies to
Money customers owe your company, and obligations your company will probably have to settle where the amount or timing is uncertain
Where it shows
A reduces the debt itself. It never goes under ""
If you get it wrong
Debts left at full value when a customer cannot pay make your profit and your assets too high

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. Record what each customer owes at the invoice price. The exception is where they will pay much later than normal. See "Less common situations".

  2. At each year end, look for signs a customer will not pay in full. Examples are serious money trouble, missed payments or likely bankruptcy.

  3. If there are signs, work out the cash you expect from the debt. If waiting for it makes a difference, use its value in today's money. If the debt is higher, write it down to that figure. The difference is a loss this year.

  4. Record a provision only if it passes three tests. They are under "Provisions: obligations you will probably have to settle".

  5. Review any provision at each year end. Change it to your current best estimate.

Sources

How it works

Money customers owe you

A customer's debt goes in your accounts at the invoice price. You can only record it once your company is a party to the contract. The sale itself counts when the customer takes the goods or service.

At each the debt stands at the invoice price, less anything the customer has paid, less any for a bad debt. You can take the write-down off the debt directly, or keep it as a separate running total against your debts.

The has no debtors line. The layout does not say where debts go. The fuller layout for larger companies lists debtors under current assets. That points to "Current assets".

Sources

The detail The exact rules

paragraph 9.4: a financial asset is recognised only when the micro-entity becomes a party to the contractual provisions of the instrument. Paragraph 9.5: it is first recognised at cost, measured at the transaction price. Example 2: for receivables (trade debtors), the transaction price equals the invoice price unless payment is deferred beyond normal credit terms.

Paragraph 9.12: at each year end it is measured at (a) the transaction price; (b) plus not yet recognised in profit or loss; (c) plus cumulative interest income recognised to date; (d) minus all repayments of principal and interest receipts to date; (e) minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability.

A micro-entity need show only the items in the Section C (SI 2008/409, Schedule 1, paragraph 1(1A)). They have one "" item and no debtors item, and do not say which item holds debtors or which profit and loss item carries their impairment. In the Section B formats for other companies, debtors are a sub-heading of "C. Current assets". The micro-entity minimum accounting items are presumed to give a true and fair view (Companies Act 2006, section 396(2A)).

Sources

Bad debts: writing a debt down

At each year end, check each debt for signs it may not be paid in full. The standard lists these signs:

  • the customer is in serious money trouble

  • the customer has broken the contract, for example by missing payments

  • you have given the customer easier terms because of their money trouble, which you would not otherwise give

  • the customer is now likely to go bankrupt or into another financial reorganisation

A debt is impaired if its value in your accounts is more than the cash you expect to get from it. If waiting for that cash makes a difference, use its value in today's money.

The loss is the difference. It goes in your straight away. That way, the debt never stands in your accounts at more than the cash you expect from it.

For example

Say a customer owes £800 and is in serious money trouble. You expect to get £500.

Bad debt
£800 − £500
£300
Debt in the accounts
£500

You record a £300 loss this year, and the debt stays at £500.

If the loss later shrinks because of something that happens after you recorded it, reverse that part. The reversal goes straight to your profit and loss account. An improvement in the customer's credit rating is one example.

Sources

The detail Impairment in full

FRS 105 paragraph 9.16: at the end of each reporting period, a micro-entity shall assess whether there is evidence of impairment of any financial asset. Paragraph 9.17: evidence includes (a) significant financial difficulty of the ; (b) a breach of contract, such as a default or delinquency in interest or principal payments; (c) the , for economic or legal reasons relating to the debtor's financial difficulty, granting a concession it would not otherwise consider; (d) it has become probable that the debtor will enter bankruptcy or other financial reorganisation.

Paragraph 9.18(c): the asset is impaired, and an impairment loss is recognised, if its exceeds the total of estimated net cash flows that can be generated from it. When the effect of the time value of money is material, the net cash flows are their , discounted at the asset's current contractual interest rate. An impairment loss is immediately recognised in profit or loss. FRS 105 Appendix I defines an impairment loss on a financial asset as the amount by which its carrying amount exceeds the amounts set out in paragraph 9.18.

Paragraph 9.19: a previously recognised impairment loss is reversed if in a later period it decreases and the decrease can be related to an event occurring after the impairment was recognised. The reversal is recognised in profit or loss immediately.

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A "bad debt provision" is not a provision

People often call a write-down a "provision". The standard says it is not one. It is a cut in the value of an asset, not something your company owes.

So it reduces the debt within your assets. It does not go under "".

Sources

Provisions: obligations you will probably have to settle

A provision is something your company owes where the amount or the timing is not yet certain. You record one only if all three of these are true at the year end:

  • something that has already happened has left your company with an obligation

  • it is more likely than not that your company will have to settle it, by paying or otherwise giving up something of value

  • you can make a reliable estimate of the amount

The first test means your company has no realistic way to avoid settling it. So a cost that depends on what your company does next does not count, however likely it is. That applies even if a contract requires it. You cannot make a provision for future .

Record the provision at your best estimate of what it would take to settle it at the year end. For a single obligation, that may be the most likely outcome. If other outcomes are mostly higher or mostly lower, adjust your estimate up or down. Review it at each year end and update it.

For example

Say a customer claims £3,000 for faulty work before your year end. You will probably pay, most likely £2,000, with other outcomes evenly spread.

Provision
£2,000

You record a provision of £2,000 at the year end.

The micro-entity balance sheet has a separate line called "Provisions for liabilities". That is the natural home for a provision, though the law does not say so in terms.

Sources

The detail Provisions in full

FRS 105 paragraph 16.4: the word "provision" is sometimes used for , impairment of assets and uncollectible receivables. Those are adjustments of the carrying amounts of assets, not , and are not covered by Section 16. Appendix I: a provision is "a liability of uncertain timing or amount".

Paragraph 16.5: a provision is recognised only when (a) the micro-entity has an obligation at the reporting date as a result of a past event; (b) it is probable (more likely than not) that it will be required to transfer economic in ; and (c) the amount can be estimated reliably. Paragraph 16.7: (a) means it has no realistic alternative to settling, through a legal or constructive obligation. Obligations arising from its future actions do not satisfy (a), no matter how likely and even if contractual. Paragraph 16.14: no provision for future operating losses. Paragraph 16.12: provisions are reviewed and adjusted at each reporting date.

Paragraph 16.8: a provision is measured at the best estimate of the amount required to settle the obligation at the reporting date. For a single obligation, the individual most likely outcome may be the best estimate, but other possible outcomes are considered; where they are mostly higher or mostly lower, the best estimate will be higher or lower. When the effect of the time value of money is material, the provision is the present value of the amount expected, at a pre-tax discount rate.

The Section C formats include "Provisions for liabilities" as a separate item. No passage says in terms that a provision is shown there.

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Possible bills and possible gains

Some obligations are only possible. Others are real but fail the "more likely than not" or "reliable estimate" test. These are "". You do not record them as a liability. Instead, include them in the note on , guarantees and contingencies. You need not give the amount if the chance of paying is remote.

It is one of the four notes every micro-entity must give, and the only one the accounts regulations require. It gives the total of any commitments, and contingencies not on your balance sheet.

You do not record a possible gain. If it becomes virtually certain, it is no longer only possible, and you record it.

Sources

The detail Contingencies in full

FRS 105 paragraph 16.17: a contingent liability is either a possible but uncertain obligation, or a present obligation not recognised because it fails condition (b) or (c) of paragraph 16.5. It is not recognised as a liability, except for provisions for contingent liabilities of an acquiree in a trade and asset acquisition. Paragraph 16.18: a is not recognised as an asset; when the flow of future economic benefits is virtually certain, the related asset is not a contingent asset and its recognition is appropriate. Paragraph 16.19: commitments, guarantees and contingencies not recognised are disclosed under Section 6, but the amount of a contingent liability need not be disclosed when the possibility of an outflow of resources is remote.

SI 2008/409 regulation 5A: the only note the Regulations require of a micro-entity is the paragraph 57 note. FRS 105 paragraph 6A.4: the total amount of any financial commitments, guarantees and contingencies not included in the balance sheet must be stated.

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Bad debts and your Corporation Tax

Your company's taxable starts from accounts drawn up under normal accounting rules, with any changes the tax law requires.

For companies, HMRC says bad debts on trade income are dealt with under the "" rules, the tax rules for money owed. The law applies those rules to a write-down on an unpaid trade debt that did not come from lending money. They also apply to any reversal of that write-down.

never show , the future tax effects of this year's figures.

Sources

The detail The tax rules

HMRC's Income Manual (BIM42701): "Bad debts of companies which are in respect of trade receipts are dealt with under the loan relationship rules."

Corporation Tax Act 2009, section 479: a company has a relevant non-lending relationship if it stands or has stood as creditor in relation to a money debt that did not arise from a transaction for the lending of money, and on which an impairment loss (or a credit for its reversal) arises in respect of an unpaid business payment. A business payment is one that, if paid, would be a receipt of the company's trade or property business. Section 481: Part 5 (loan relationships) then applies to the impairment and to any reversal.

FRS 105 paragraph 24.7: a micro-entity shall not recognise deferred tax.

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Consequences

If you get it wrong

If a customer cannot pay and you leave the debt at full value, your profit and your assets are too high.

A shown under "" is in the wrong place. It reduces the debt. It is not a liability.

Do not what a customer owes you against what you owe them. You can only do so where you have a legal right to set one against the other and you mean to settle them together.

Sources

Less common situations

A customer goes bankrupt after your year end. If this happens before the accounts are approved, it usually confirms the debt was already bad at the . Adjust the accounts for it.

A customer will pay much later than normal. If, when the contract starts, you expect payment more than 12 months away and beyond normal credit terms, record the cash price instead.

A debt is finished with. Remove it when the right to payment ends or is settled, or when you expect nothing more from it. Also remove it if you pass nearly all its risks and rewards to someone else. Any gain or loss goes to your .

A flat percentage across all debts. The rules work from evidence about a debt and the cash it can bring in. They do not describe a flat percentage, so base each write-down on evidence.

New customer contracts. For periods starting on or after 1 January 2026, a contract counts only if it passes several tests. One is that the customer is likely to be able and willing to pay. This applies to contracts starting after your company first uses the new rules.

Sources

Worked example: Bramley Studio Ltd

Bramley Studio's accounts for 2026 show profit before tax of £27,500, of £31,900 and of £27,600.

For this example, say the £31,900 includes a £1,500 invoice owed by a sole-trader customer. The customer is made bankrupt after 31 December 2026, before the accounts are approved. Bramley expects to get £300. Say the timing of that £300 makes no difference.

The bad debt

  • Invoice owed

    £1,500

    Its value in the accounts

  • Cash expected

    £300

    The bankruptcy usually confirms the loss existed at 31 December, so Bramley adjusts

  • Bad debt

    £1,200

    £1,500 − £300. The debt now stands at £300

Sources

Effect on the accounts

  • Profit before tax

    £26,300

    £27,500 − £1,200. The layout does not say which line carries the loss

  • Current assets

    £30,700

    £31,900 − £1,200

  • Net assets

    £26,400

    £27,600 − £1,200, before any change to the tax charge

Sources

If Bramley later gets more than £300 because of a later event, it reverses that part of the loss through its .

Sources

Not covered here

The tax treatment of provisions, and how provisions for acquired businesses work. See how the micro-entity accounts are laid out, events after the year end and loans to and from a director.

Where this comes from

68 official sources. Open a group to see them.

The law 18 sources
HMRC 11 sources
GOV.UK 10 sources
Companies House 2 sources
FRC 27 sources

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