Managing Receivables: From Credit Sales to Doubtful Debt Provisions

If your income statement shows a profit but your bank account never does, the profit is probably sitting in accounts receivable. This is written for owners and finance staff of Iranian businesses that sell on credit and want to turn receivables from a passive balance sheet line into a controlled process — in accounting terms and in tax terms.

Why receivables are the riskiest asset you hold

Cash is worth what it says. Inventory is usually worth something close to its carrying value. Receivables are the one asset whose real value is only revealed by time. In the files I have handled, the largest cash losses at small companies rarely came from falling sales; they came from two or three customers who were extended credit for years on the strength of trust.

Inflation makes this worse in a way the ledger never shows: a receivable collected six months late with no penalty has lost real purchasing power. You have given a discount without recording one.

Control begins before the sale

Screening new credit customers

Before opening a credit account, check registration status, trading history, bounced-cheque record and standing with other suppliers. Confirming a corporate customer is genuinely active takes minutes and prevents a large share of later losses.

Written limits and terms

Every customer needs a documented credit limit and settlement period, and the system should flag invoices that breach it. Verbal arrangements are the source of most disputes. Settlement clauses, late-payment penalties and retention of title matter as much as the tax clauses in the same contract.

The aging report

Aging classifies balances by days past due. It is both a management tool and the basis for estimating the provision.

The loss rates in the last column should come from your own history, not from a textbook. If you have three years of data, compute what proportion of each bucket eventually went uncollected — that becomes your provision basis.

Metrics worth reviewing monthly

• Days sales outstanding — average receivables divided by daily credit sales. The trend matters more than the absolute number.
• Overdue ratio — overdue balances as a share of total receivables. A rising ratio points at your collection process, not the market.
• Customer concentration — the largest customer's share of receivables. Above roughly 20–30 per cent, one insolvency can take you down with it.
• Cash cycle gap — the difference between collection days and supplier payment days, covered in cash flow and working capital management.

Estimating the provision

Matching and prudence require the expense to be recognised in the period the doubt arises, not the year the debt formally dies. Three common methods:

1. A percentage of credit sales — quick, suited to businesses with many small customers.
2. Rates by age bucket — more accurate, based on the table above and your own history.
3. Specific review of large customers — individual assessment based on real evidence: bounced cheques, ceased operations, litigation.

In practice, combining the second and third works best: assess major accounts individually and apply bucket rates to the remaining portfolio. The provision is a contra-asset presented as a deduction from gross receivables; direct removal of the balance happens only when collection is definitively impossible.

Where accounting and tax part ways

This is where most mistakes occur. An estimated provision is not automatically a deductible expense. Iranian tax law accepts a loss on uncollectible receivables subject to conditions that always amount to the same three tests: the claim must be established and supported by a valid invoice or contract; it must previously have been recorded in the books; and its uncollectibility must be demonstrated through legal steps that produced no result.

The practical consequence is a difference between accounting profit and taxable income in the year the provision is booked, which must be shown in the tax reconciliation attached to the return. The general conditions for expense deductibility are set out in tax-deductible expenses.

Writing off a debt, step by step

1. Assemble the customer file: invoice, delivery note, statement, correspondence.
2. Send a formal written demand through an officially registered channel and keep the receipt.
3. Where you hold a cheque or promissory note, obtain the non-payment certificate within the legal window and start enforcement.
4. If that fails, file suit or proceed through the enforcement office and archive the record.
5. Once conclusive evidence exists, post the write-off with the full documentation attached.
6. Disclose the amount in the schedules supporting the tax return.
7. If part is later recovered, recognise it as income of that period — unrecorded recoveries of written-off debts are a familiar concealment finding.

Commonly overlooked points

Offsets against a supplier who is also a customer need a signed reconciliation, not a quiet adjusting entry. Early-settlement discounts belong in the contract and on the invoice. Foreign-currency receivables must be retranslated at period end and the effect reported separately. Most importantly, amounts due from shareholders and related parties belong in their own account — mixing them into trade receivables destroys the aging report and invites awkward questions about separating personal and company money.

Key takeaways

• Receivables are not profit until collected; a monthly aging report is the minimum control.
• Set credit limits and terms in writing before the sale, not after the delay.
• Estimate the provision from your own loss history, combining bucket rates with specific review.
• An estimated provision is not deductible by itself — tax relief requires an established, booked claim plus documented legal action.
• Keep shareholder and related-party balances out of trade receivables.