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June 10, 2013 / Pandeeswari Ramakrishnan

Managing doubtful debt in Openbravo

The reason why companies go for ERP application can be broadly categorized into the following points:
1. Streamline process and thereby business.
2. Easy access of data.
3. Historical Analysis that can be used for forecasting and risk management

Openbravo, being an agile ERP handles all the above points aplomb. One feature related to risk mitigation as part of risk management is Doubtful Debts. This is a common scenario in almost all the companies. At times clients who have some debt pending run into crisis and you know that the debt is unlikely to come very soon. But unless you bring this debt into the accounts there is a high possibility that there would be discrepancies while forecasting based on the current data. The Doubtful Debt feature allows marking a particular payment as ‘doubtful debt’ and in case where you are really sure that the money is never going to be collected, it will be moved to ‘bad debt’ account.

Configuration
Before start working with Doubtful Debt some previous configuration steps are required:

  • To configure Accounting for Doubtful Debts. The accounts that need to be configured can be found in Business Partner window, Accounting Tab, and are:
    • Doubtful Debt Account
    • Bad Debt Expense Account
    • Bad Debt Revenue Account
    • and Allowance for Bad Debts Account.
  • To create a Preference in order to be able to see the amount of a debt that has been classified as doubtful when receiving a Payment.
  • This preference must be defined for the Client and the Organization that needs to see it.
  • This preference is an Attribute ‘Doubtful_Debt_Visibility’ which Value needs to be ‘Y’
  • To create a Document Type for Doubtful Debts.
  • This step is not a must, since there is already a Standard Document Type defined for Doubtful Debts.

Example Scenario:

Let’s visualize the doubtful debts through the example case provided here. The Customer Healthy Food Supermarkets, Co. has an Invoice of 1.000,00 USD pending to be collected, and this is it’s Journal Entry, created when Posting the Invoice.

DDInvoicePosting

After three months without collecting the pending debts from this Customer, the debt from the previous Invoice is considered Doubtful, henceforth a Doubtful Debt Run needs to be created and processed. As shown in the image below, the “Run Date” and the “Accounting Date” are the same, that is 90 days after the Invoice Date, as well as the Days Overdue.

900px-DDDoubtfulDebtRun
Back to the Doubtful Debt Window, the doubtful debt created and processed in the Doubtful Debt Run can be posted. Two entries are generated in the Journal. One to reclassify the debt from Accounts Receivable to Doubtful Debt and the other one to represent the provision for the Doubtful Debt.

DDDoubtfulDebtPosting
A couple of days after, the Customer makes a Payment of 350,00 USD against the previous Invoice, and the Posting of the Payment creates this entries in the Journal. One entry that balances the Doubtful Debt and the Checking In-Transfer Account, and the other entry that decreases the Doubtful Debt provision generated previously.

DDPaymentPosting1
Three months later the Customer becomes bankrupt, therefore it won’t be possible to recover it’s debt any longer. A Payment is made to write off the amount remaining. That action creates another two entries in the Journal.

DDPaymentPosting2

Reversing doubtful debt:
In case we have received the debt back, we can always reverse the doubtful debt using the ‘Doubtful Debt Run’ window. Here we can select the doubtful debt that we wish to reverse and reactivate it and make necessary modifications. Note that we cannot reactivate a doubtful debt that is already posted. In this case, we have to unpost the document and then reactivate it.

An ERP implementation is as effective as the users using it and the data it is fed with. By allowing payments to be marked as doubtful debts, the system will provide an even more clear picture of the status of the current accounts. Doubtful debts feature is available from 3.0 MP20 version.

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