What is Allowance for Doubtful Debts?
The allowance for doubtful debts (also called allowance for doubtful accounts) is a contra-asset account that reduces gross trade receivables to the amount expected to be collected, calculated under the IFRS 9 expected credit loss (ECL) model.
How It Works
- Calculate ECL: aged receivables × loss rate by bucket.
- Record allowance: debit bad debt expense, credit allowance for doubtful debts.
- Net receivables presented on balance sheet = gross AR – allowance.
- Write-offs reduce both gross AR and the allowance.
Saudi Context
Saudi SMEs typically use a simplified IFRS 9 approach: a provision matrix based on aged receivables, often with rates such as 1% current, 5% 31-90 days, 30% 91-180 days, 100% >180 days. ZATCA accepts the allowance as a deductible expense, though specific bad debt write-offs require documented collection efforts to be deductible.
Example
A Saudi distributor has SAR 4,000,000 in receivables aged as: current 60%, 31-90 days 25%, 91-180 days 10%, >180 days 5%. Allowance = (2,400,000 × 1%) + (1,000,000 × 5%) + (400,000 × 30%) + (200,000 × 100%) = SAR 24,000 + 50,000 + 120,000 + 200,000 = SAR 394,000.