Canadian Tax Help – Accounts Receivable On A Balance Sheet

Grant Gilmour

This post deal with “Accounts Receivable” on a Balance Sheet. The Accounts Receivable category appears under Current Assets on a Balance Sheet as it is expected that amounts outstanding will be collected within one year. It represents funds that a company has a right to receive because it has provided customers with goods and services.

Accounts Receivable may consist of trade receivables, which are amounts due from customers; or as non-trade receivables, such as advances given to employees.

Companies who sell on credit are unlikely to have liens on their customers’ property. Hence, there is a risk that the full amount of their Accounts Receivable might not be collected. It is good business practice to set a credit limit for each customer depending on their relationship and collection history. It is important that the company monitors its Accounts Receivable and takes action with any customer who has not paid as agreed. A general rule is that the older a receivable gets, the less likely it will be collected in full.

An Accounts Receivable aging report is commonly reviewed, which summarizes unpaid customer services by date ranges. This report is an important tool used by collections to determine which invoices are past due. It is also a tool used to estimate potential bad debts.

Bad debts are recorded as an expense on the Income Statement. There are two different methods used for tax to calculate bad debts. One method is to review individual accounts and determine the collectability of their outstanding invoices. When you identify the exact invoice and have proof that it was uncollectable, you can then write it off to bad debt expense and recover the GST, PST and income tax paid on that income. Alternatively, you can establish a reasonable policy based on experience and setup a contra account called allowance for doubtful accounts for the estimated bad debts. This gives you immediate income tax relief on the uncollectable amounts but it does not give GST or PST relief. You set up this allowance periodically (i.e. once a year) and then monitor it. Then when you feel you cannot collect a specific invoice, you revert to the first method and simultaneously lower your allowance for that amount.

Another component of Accounts Receivable is holdbacks which is money that remains unpaid until certain conditions are met. For more information on holdbacks, please see FAQ #184.

Grant has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.

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