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Learn how to adopt the standard bad debt process in SAP ERP Financials to ensure
better integration to original items, better reporting, and more accurate provisioning as
per various regulatory needs.
The bad debt process is a standard SAP functionality that allows you to do provisioning on
the customer overdue items that are not likely to be recovered. It enables the tracking of such
open items separately by using a special general ledger indicator, and also books the likely
provision under an expense account in timely manner to avoid the sudden impact on a profit
and loss account owing to a customers non-payment.
Nearly all organizations have account receivables (customers), and there is always a risk of
customers not paying their outstanding amount for invoices on time or even not paying
anything at all. Therefore, companies need to make necessary provisions for such overdue
items that are likely to be irrecoverable. Companies need to make these provisions to comply
with various regulations such as the Sarbanes-Oxley Act and International Financial
Reporting Standards (IFRS).
In this article, I cover enhancements to a standard SAP system for the following scenarios:

1. How to ensure the proper profit center splitting during the transfer of doubtful items
2. How to ensure consistency between original and new documents
3. How to influence the treatment of credit items and the options available
4. How to influence the treatment of payment for and write-offs of doubtful items
Before describing these scenarios, I first show you the steps for the standard process for bad
debt in an SAP system. To complete a standard bad debt process in an SAP system, execute
transaction code F103: menu > Accounting > Financial Accounting > Customers > Periodic
Processing > Closing > Valuate > F103 - Receivables Transfer Posting (Gross). This process
reclassifies all overdue invoices and credit memos to a target reconciliation account using a
special general ledger (G/L) indicator (standard special G/L indicator = E).
When you execute transaction F104 and follow menu path > Accounting > Financial
Accounting > Customers > Periodic Processing > Closing > Valuate > F104 - Reserve for Bad
Debt (Gross), you make a provision for invoices reclassified in transaction code F103
according to the percentage defined in the system as per your bad debt policy.
Now I explain the details of various scenarios to enhance the SAP standard process for bad
debt provisioning.

How to Ensure the Proper Profit Center Splitting During the Transfer of
Doubtful Items
It is quite common for customer invoices to have different profit centers in the same
document. The original customer items in the document are split into respective profit centers
if document splitting is active using the SAP General Ledger. In Figure 1, the customer line
item is split into two line items based on the profit centers of lines 2 and line 3.

In a standard SAP system, the Document Type of the Posting is defaulted in transaction code
F103 as DA

If you execute transaction code F103 with this document type DA, the transfer posting
document created from transaction code F103 does not have the profit center splitting for the
new open item for the special G/L indicator. Instead, the transfer posting document fills the
default profit center (which is assigned in customization) as shown in Figure 3. (When no
default profit center is assigned in customization, the error message GLT2 201 Balancing
field &1 in line item &2 not filled appears, and the document cannot be posted.)

Therefore, the use of document type DA creates a problem in profit center reporting for the
customer line items. For normal transactions with document type DA, the SAP system uses
an active splitting method, and information does not need to be derived from any previous
document. For payments, document type DZ is used. DZ is also configured for passive
splitting with business transaction 1010 and variant 0001, but you cannot use DZ because the
posting by transaction code F103 is not really a payment. To solve this issue, you need to
configure the following customization settings:
In customization transaction OBA7 (SPRO > Financial Accounting (New) > Financial
Accounting Basic Settings (New) > Document > Document Types > Define Document Types
for Entry View), create a new document type by copying standard document type DA (e.g., a
new custom document type Y1 as shown in

In customization transaction GSP_VZ3 (SPRO > Financial Accounting (New) > General
Ledger Accounting (New) > Business Transactions > Document Splitting > Classify Document
Types for Document Splitting), assign the above created document type to business
transaction 1010 and variant 0001 (Figure 5). This step enables the passive document
splitting for the document posted by transaction code F103, and the profit center split is
correctly transferred from the original customer line item to the new transfer posting. This step
ensures that the splitting characteristic of the original document is transferred to the transfer
posting created in transaction code F103.

Now if you execute the transaction F103 with this new document type Y1, the transfer posting
document created from transaction F103 has the proper profit center splitting as shown
in Figure 6, ensuring that the original split is carried forward for new items and keeping
reporting consistent.

Also during provisioning in transaction F104, the same profit center split is carried forward to
the provision account . For an expense account the profit center is derived based on the cost
object assignment to the expense account.

How to Ensure Consistency between Original and New Documents

Note that this bad debt provision is internal within the organization and customers should not
know about such provisioning for the amount likely to be irrecoverable. All correspondence or
other communication to customers still needs to contain the information based on the original
open item so that there is no change from the customers point of view. The customers can
still trace back the original invoices based on the account statements generated after
provisioning for bad debts. Therefore, it is necessary for the transfer postings created from
transaction F103 to still contain various types of information (e.g., document date, invoice
reference, and amounts e) from original line items. In a standard SAP system, most of this
original line-item data already has been copied to new postings created by transaction F103.
Generally, the document date is the date when an invoice is issued to the customer.
Customers can post the invoice in their books taking this document date into consideration.
Therefore, the new transfer posting created from transaction F103 needs to have the same
document date as the original document. When you generate the customer statement, it
shows the open items that are now the new line items with a special G/L indicator. Even then
the customer statement still shows the document date as in the original line item because it is
also the same in the new line items with a special G/L indicator.

To enable this feature, you need to implement SAP Note 392221

(https://service.sap.com/sap/support/notes/392221). Then a new option (Use original
document date) appears on the selection screen of transaction F103

If you select the Use original document date field, the transfer posting takes the document
date from the original item. Otherwise, the transfer posting takes the document date as
entered on the selection screen of transaction F103.

Reference to Original Document in New Transfer Postings

A standard SAP system stores the original customer item information (document number, line-item
number, and fiscal year) in the assignment field of the line items of the transfer postings created from
transaction F103 and the provision created from transaction F104. However, you might be interested
in seeing the original line-item information in the header of the document so that you can analyze the
link to the original line item even in the document list display. Also, when you build custom logic to
read database tables, the selection query on the header database table (BKPF) is faster than a query
on line-item tables (e.g., BSEG). The postings created from transaction F104 also do not have any
information about the customer to which the provision belongs unless you navigate back to the
original document.

Implement SAP Note 582442 (https://service.sap.com/sap/support/notes/582442) to meet these

needs. After you implement this note, you notice the following changes:

For the transfer posting document created from transaction F103, the Document Header Text
field (BKPF-BKTXT) = original document information (document number, line-item number,
and fiscal year) (due to SAP Note 582442)

Assignment field (BSEG-ZUONR) in each line item = original document information

(document number, line-item number, and fiscal year)

Special G/L assignment field (BSEG-HZUON) of special G/L line item = original document
number

For provision documents created from transaction F104, the document header text field
(BKPF-BKTXT) = original document information (document number, line item number, and
fiscal year)

Assignment field (BSEG-ZUONR) in each line item = customer number

If you are using transaction FAGL_104 for provisioning postings, also apply SAP Note 1802289
(https://service.sap.com/sap/support/notes/1802289).

Amounts from Original Items

A standard SAP system transfers the same amount in document currency and local currency as exists
in the original item.
However, you might have defined the second local currency and third local currency in customization
transaction OB22: SPRO > Financial Accounting (New) > Financial Accounting Basic Settings (New) >
Ledgers > Ledger > Define Currencies of Leading Ledger. If this is the case, to enable transfer of the
same amount in local currencies 2 and 3 to the transfer document created via transaction F103, you
need to implement the following SAP Notes:
1. 1758333 https://service.sap.com/sap/support/notes/1758333
2. 1829536 https://service.sap.com/sap/support/notes/1829536
3. 1813210 https://service.sap.com/sap/support/notes/1813210
Implementing these three SAP Notes ensures that the same amounts are transferred to new
documents and thus there is no foreign currency valuation impact created by these new postings.

Other Fields from Original Items

SAP provides SAP Note 551975 (https://service.sap.com/sap/support/notes/551975) to enable you to
copy other fields from original items to transfer postings created in transaction F103.
This SAP Note demonstrates the field Payment Reference (KIDNO), but the same concept can be
applied for other fields such as the following:

Business partner reference key (XREF1)

Business partner reference key (XREF2)

Reference key for line item (XREF3)

Number of the Invoice the Transaction Belongs to (REBZG)

Fiscal Year of the Relevant Invoice (for Credit Memo) (REBZJ)

Line Item in the Relevant Invoice (REBZZ)

How to Influence the Treatment of Credit Items and Various Options

The SAP system makes the transfer postings in transaction F103 for a customer only when the net
balance is positive after considering the credit items such as payments or credit notes. However, a
standard SAP system provides various options to calculate the percentage for provision for these
credit items in transaction F104. Generally, the moderate strategy explained in Table 1 is suitable for
most of the organizations. However, some organizations may prefer other strategies.

How to Influence the Treatment of Payment for and Write-Offs of Doubtful

Items
Now once the customer item is marked as a doubtful item (and thus a transfer posting is made to a
special G/L indicator via transaction F103), the next issue is what happens if that customer has fully
paid, partially paid, or not paid the overdue item.
During transaction F104, in the case of cleared items (payments or write-offs) that contain a provision
that is smaller than 100 percent, the standard SAP system reverses the provision. In such cases, it is
assumed that the original item has already been paid because the SAP system uses the 100 percent
as an end flag and treats it as a written-off item. The SAP system does not have any way to determine
whether the clearing of such an item is a write-off or a payment.
However, in this case the problem occurs when for customer items already provisioned for 100
percent, the customer makes a full payment or that item is totally written off. In such a case the earlier
provision is not reversed as the standard SAP system reverses only if the original provision is smaller
than 100 percent. In the case of a write-off, this behavior is still satisfactory, as the amount is still to be
booked under a bad debt expense account, but for full payment scenario, the earlier provision needs
to be reversed as there is no need to book the bad debt expense.
To meet this objective, you need to follow this process:
1. Make system changes (I describe these changes in the next section) to enable the reversal of
provision during transaction F104 in all cases of clearing items (full payment, partial payment,
and write-off).
2. For payments (full or partial), the reversal of the earlier provision in F104 is sufficient and no
more action needed.
3. For the write-off of the customer item, the contra account to be posted during write-off needs
to be the bad debt expense account. For the write-off case, the provision that is reversed in
the F104 is still booked into the bad debt expense account.

System Changes Needed to Enable Reversal of Provision in All Cases

To enable this feature, there are two options mentioned in SAP Note 319803
(https://service.sap.com/sap/support/notes/319803):
Option 1: In the customization transaction OB04, SPRO > Financial Accounting (New) > Accounts
Receivable and Accounts Payable > Business Transactions > Closing > Valuate > Reserve for Bad
Debt > Define Methods, define the maximum amount of the provision as 99 percent instead of 100
percent. Then during transaction F104, the SAP system always reverses the provisioning for all the
cleared items, as original items are always provisioned at less than 100 percent owing to this
provisioning method definition. However, I do not recommend this approach because it results in the
bad debt under-provisioning by 1 percent and auditors can object to this approach.
Option 2: Make the source code corrections as given by SAP in SAP Note 319803
(https://service.sap.com/sap/support/notes/319803). Then, also during transaction F104, the SAP
system always reverses the provisioning for all the cleared items. This option is preferred over the first

option as here the original provisioning can be made up to 100 percent and even then system
reverses the provisioning for cleared items.
During execution of transaction F104, you can mention the date range for the clearing date, as shown
in Figure 9, so that the SAP system reverses the provision only for the items cleared during this
period. Make sure that the Clearing date range end date is not beyond the date in the Open items at
key date field.

You now understand the various options available to make the SAP bad debt process work as
per your needs. These options ensure better integration to original items, better reporting, and
more accurate provisioning in accordance with various regulatory needs.

Improve Your Bad Debts Risk Reporting

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.
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.

How the Bad Debt Functionality Works

SAP's complete reserve for bad debt functionality consists of two parts. The first step is the
transfer of the open items from the standard debtor's reconciliation account to a special bad
debt reconciliation account (Figure 1). In the Customizing settings, you can indicate that open
items that are overdue for more than a specific number of months should be transferred to the
special bad debt reconciliation account.

Step two of the bad debt process is to post the provisions (reserves) for bad debts. This step can only
occur after the item appears in the bad debt reconciliation account. Once that has occurred, it is
possible to post provisions for bad debts for this item.
In the Customizing settings, you can indicate that provisions are to be posted for bad debt open items.
This is always a percentage of the open item value. The percentage depends on the number of
months the item is overdue. In this configuration example, if an item is overdue for one month, a
provision of 10 percent is made initially. After two months, 50 percent must be posted as a provision.
This leads to the posting