Version 1.0
Prepared by: @Lorraine Sebata
Approved by: @Marcia Wilkinson
Reviewed date: 2025-09-17
Next review date: 2026-09-17
This SOP outlines the step-by-step process for estimating and accounting for potential losses due to uncollectible outstanding debts. Its purpose is to ensure accurate reflection of the company's financial health by anticipating and preparing for potential bad debts, thereby ensuring more realistic financial statements and aiding in effective budgeting and decision-making.
This SOP applies to the Accountant and other relevant staff within the Accounts Department responsible for the monthly preparation and update of the Bad Debt Provision Report. The bad debt calculation derived from this process is used to post a bad debt expense on the Profit & Loss Statement, with the offsetting account being the Bad Debt Provision Account on the Balance Sheet, acting as a contra account to Accounts Receivable.
Accountant: Primarily responsible for the preparation, update, and initial review of the Bad Debt Provision Report and related financial entries.
Accounts Department Staff: May assist the Accountant in compiling and updating the report on a monthly basis.
CEO: The reserve is system-generated (see other article); however, the CFO may apply a further adjustment.
5.1.1 Access LMS.
5.1.2 Select 'Menu' from the main interface.
5.1.3 Navigate to 'Monitoring and Reporting'.
5.1.4 Select 'Aging Trial Balance' from the sub-menu.
5.1.5 Enter the required date, typically the end of the month for which the report is being prepared.
5.1.6 Click on 'Update' to generate the report.
5.1.7 Once the report is generated, export the file to Excel for further processing.
5.2.1 Open the designated 'Bad Debt Provision Report' template or file.
5.2.2 Export the complete loan book aging data from the Aging Trial Balance Report.
5.2.3 Identify outstanding receivables beyond the company's predetermined threshold for bad debt classification (as per Credit Policy FIN-002).
5.2.4 Apply bad debt percentages based on aging brackets and established company policy and historical collection data to the identified outstanding receivables.
5.2.5 Calculate the total bad debt provision required for the entire loan book based on aging classification (rather than at individual customer level).
5.2.6 Segment the reserve totals by portfolio classification (Private vs. Other) to enable comparative performance analysis.
5.2.7 Update the Bad Debt Provision Report with the following details:
Aging classification brackets.
Outstanding balance by aging bracket.
The bad debt percentage applied per aging bracket.
The calculated provisioned bad debt amount per aging bracket.
Reserve totals segmented by Private vs. Other portfolio classifications.
Begin by exporting the full loan book data. Using this data, identify all outstanding receivables that have surpassed the company's predetermined threshold for bad debt classification, as defined in Credit Policy FIN-002.
Apply the bad debt percentages, established by company policy and historical collection data, to the identified outstanding receivables. These percentages will be applied based on the aging classification of the receivables across the entire loan book, rather than at an individual customer level. This will allow for the calculation of the total estimated bad debt provision amount for the entire loan book.
While the primary calculation of reserves is based on aging across the entire loan book, the report will separately compute and present the bad debt provision for the Private and Other portfolios. This provides insight into the performance of each segment.
Finally, update the Bad Debt Provision Report. The report will reflect the total calculated provision for the entire loan book, broken down by aging categories. Additionally, it will clearly display the separate bad debt provision amounts for the Private and Other portfolios, allowing for targeted performance analysis.
5.3.1 Cross-check all calculations within the Bad Debt Provision Report against the original Aging Trial Balance Report to ensure accuracy and consistency.
5.3.2 Verify that the calculated provision amount aligns with current company policy, historical trends, and any specific management directives.
5.3.3 If discrepancies are found or significant adjustments are deemed necessary, consult with the CEO for review and guidance on potential write-offs or further adjustments.
5.4.1 Record the Bad Debt Expense entry in the Profit & Loss Statement, reflecting the estimated loss for the period.
5.4.2 Update the Bad Debt Provision Account in the Balance Sheet. This account serves as a contra-asset account, reducing the reported value of Accounts Receivable.
5.4.3 Ensure all journal entries are properly documented with supporting references to the Bad Debt Provision Report for audit and compliance purposes.
5.5.1 Submit the completed Bad Debt Provision Report to the CEO or designated reviewer for final review and approval.
5.5.2 Address any discrepancies, questions, or required adjustments raised by the reviewer promptly.
5.5.3 Once approved, save the finalized and signed report in the designated financial records folder, ensuring proper version control.
Aging Trial Balance Report (from LMS)
Bad Debt Provision Report (from LMS)
Profit & Loss Statement
Balance Sheet
Journal Entries (for Bad Debt Expense and Provision)
All Accountants and relevant Accounts Department staff involved in the preparation of bad debt provision reports will receive mandatory training on this SOP and related accounting policies annually or upon significant revisions.
This SOP will be reviewed annually by the Finance Department to ensure its continued effectiveness, compliance with accounting standards, and alignment with business objectives.