Improve Your Bad Debts Risk Reporting

  • by Kees van Westerop, Senior SAP Consultant, Kwest Consulting
  • January 15, 2005
SAP's reserve for bad debt functionality can help you make more accurate A/R reports. This little-known functionality helps you to automatically transfer bad debts to special reconciliation accounts and post provisions for bad debts. In addition, it's easy to configure.
Key Concept
Posting the reserve for bad debts consists of two steps. The first step identifies open items that are overdue after a certain period and transfers them from the standard reconciliation account to a special reconciliation account for bad debt open items. Next, the system calculates which percentage of a bad debt open item is to be posted on the provision account for bad debts.

The Sarbanes-Oxley Act has increased the requirements for corporate financial reporting worldwide. Reports must be more accurate and more reliable. In terms of SAP's Accounts Receivable (AR) module, this means that reporting must indicate the risk of bad debts, i.e., invoices that might never be paid.

The SAP R/3 system has special bad debt functionality to help you make more accurate financial reports regarding accounts receivable. The functionality, which is not very well known, automatically transfers bad debts to special reconciliation accounts and then automatically posts provisions for bad debts. The steps involve transaction codes F103 and F104. This functionality is available since SAP R/3 Release 2.2.

In most companies, A/R reporting consists of merely reporting the balances of the A/R reconciliation accounts. Companies often differentiate among open items — for example, open invoices, down payments, or guarantees. The report gives no indication of the risk of open items, the so-called bad debt risk. Also, the net result of the reporting is not corrected for the bad debt risk.

I will describe how you can automatically mark an open item as a bad debt and how the item is transferred to a special reconciliation account. The automatic transfer is based on the length of time the item is overdue. Then I will describe how to post the provisions for bad debt, also based on how long the item is overdue. Finally, I will walk through the customizing steps to set up this functionality.

Kees van Westerop

Kees van Westerop has been working as an SAP consultant for more than 25 years. He has an MBA degree in mathematics and a degree in finance. Kees has been concentrating on the financial modules, especially in general ledger accounting, cost center accounting, and consolidation. He also has a great deal of experience with rollouts of kernel systems and integrating finance and logistics.

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