Income statements in Singapore can be complex and confusing. Figuring out how to traverse the confusing portions of an income statement, such as bad debt recovery, can be challenging if you’re not entirely sure what you’re looking at. It can also be difficult when you’re told to find something on an income statement and you’re not entirely sure what you’re looking for. The biggest challenge, however, can be figuring out how to write an income statement.
Income statements have to be written up for a variety of different reasons. For example, the Inland Revenue Authority of Singapore (IRAS) requires income statements to be filed along with other tax information each year. Other reasons to write or review income statements can crop up any time of the year, so it’s important to make sure your financial records are always up-to-date.
Bad Debt VS Doubtful Debt
A bad debt is an outstanding debt that cannot be recovered for one or several reasons. This can occur when two companies or individuals are involved in a business deal that goes south. Let’s say business A hires business B to complete a job. Business B then charges business A for the work done. Business A, however, is unable to pay for the work and therefore refuses to do so. It is clear that Business A will not be paying the debt, so business B will have to write it off as a bad debt. If you deal with debt and drawing up financial statements, you’ll want to note that bad debt is not the same as doubtful debt. These two are often confused and admittedly similar, but they are not interchangeable. A doubtful debt means it is unlikely that a company or individual will be able to collect a debt, but the possibility still exists. Once it becomes clear that this debt cannot or will not be paid, it becomes a bad debt.
These two types of debt are dealt with differently on income statements, so it is important to be aware of the difference. In addition, the Monetary Authority of Singapore (MAS) determines if you’ll be given any provisions and what type they will be depending on what type of debt you’re claiming. These provisions will affect how you file your income taxes with the IRAS. You’ll want to know the difference, so you won’t run into any issues with either of these organizations.
Listing Bad Debt on an Income Statement
In order to comply with IRAS tax laws, you have to write off bad debts in your accounts. These write offs must appear in your financial records, so it’s important to know how to list bad debt on an income statement. This information is also important to know when it comes time to file your taxes. Where and how a bad debt is listed on an income statement, depends on the type of debt. You will have to determine whether or not a bad debt is deductible from your expenses. A trade debt is considered deductible, whereas a non-trade debt is considered non-deductible. Once you’ve determined the type of bad debt, you may list it accordingly. Both deductible and non-deductible bad debts will be listed under the Business Expenses category on your income statement.
Recovering Bad Debt
While knowing how to list bad debt on your income statement is important, it is far more beneficial for you to know how to recover bad debt. You may want to note that the IRAS may allow you to file for bad debt relief, provided you meet all of the criteria. Before this can be done, however, you must take reasonable steps to recover the debt. This can be done in a few different ways, and will ideally result in you actually recovering the debt rather than having to file for relief.
Debt Collection Agencies
One option for recovering debt is by sending it to a debt collection agency. A debt collection agency will work hard to recover your money, because generally you don’t have to pay them if they don’t recover it. This is a good route to go when you want to avoid litigation as long as possible. Some agencies even offer in-house legal support, so you don’t have to spend excess money on legal fees. Keep in mind, however, that debt collectors are strongly disliked by Singaporeans. Some companies resort to scare tactics and border on harassment, so if this is the route you choose, make sure you find a reputable company.
Knowing the Debtor
The best way to recover bad debt is by getting to know as much as you can about the debtor. If the debtor is an individual, you may want to bring up bankruptcy as an option. Declaring bankruptcy in Singapore result in personal restrictions, so if possible, the individual may decide to pay you simply to avoid these restrictions. If the debtor is a company, however, you’ll want to familiarize yourself with the company’s assets. These assets can be seized if you end up having to go to court over the debt. If your debtor has no money and little to no assets, you’ll want to avoid expensive legal proceedings since you won’t end up getting paid anyway. It would be better to try to set up a payment plan for either type of debtor.
Filing a claim should be your last resort, since it can be expensive and doesn’t always result in debt recovery. On the plus side, you’ll have a lawyer to help you with all of the sticky legal aspects. Typically, they’ll start by sending a letter of demand to the debtor. If this doesn’t result in payment, the court will proceed with a hearing. The court will order the debtor to pay, but they may still refuse. At this point, the court will seize the debtor’s assets and sell them in order to pay the debt.
Listing Bad Debt Recovery on an Income Statement
Anytime a bad debt is recovered, it has to be declared on your income statement. This is typically done through an adjustment to your accounts. If you’ve already written off the bad debt, it will be listed on your income statement as an expense. When it becomes recovered, you will have to include it as part of your gross profit for the fiscal year in which it was recovered. It is also possible to list the bad debt as a negative in your list of expenses, which may help make it clearer that it was a recovered debt.
Tax Returns and Recovered Bad Debt
Bad debt recovered in an income statement will also have to be listed on your IRAS tax returns. This is especially important if you’ve previously written off the debt. In this case, you’ll have to fill out an adjustment form. You will be required to list all previously written off bad debts that were subsequently recovered in order to comply with the tax laws, so it is important to keep all of your financial records in order.
Recovering bad debt might lead to additional work on your income statement, but the work is worth your time. Any time you’re able to recover a debt it should be viewed as a positive. This may lead to adjusting your financial records, but remember, it also means you’ve come out on top.