blog posts System Government Costing February Facts and Reminders Feb 15, 2023 10:00 amAccounting and BudgetingBuying and ContractsFY 23Managers of self-supporting funds know that some revenue generated from goods and services sold “on credit” will not be collected. Expense transactions generated to allow for uncollectable funds (i.e. bad debt) are important costs to consider, but these costs should never be passed on to internal customers. Internal Customers are not responsible for bad debt.Fund managers are advised that bad debt expenses related to services provided should remain on self-supporting funds but be recovered through rates charged to external customers only. For services using Banner AR to charge external customers, the allowance for uncollectable accounts and resulting Bad Debt expense is calculated automatically. Ensuring these expenses do not flow into internal rates requires adjustments to both the fiscal year’s expenses used in the rate calculation and the fund balance used to determine an over or under recovery on the service fund.Federal Uniform Guidance § 200.426 prohibits charging sponsors bad debts expenses for accounts deemed uncollectable. This includes related collection and legal costs arising from such debts after they have been determined to be uncollectable.System Government Costing provides detailed rate calculation templates to help fund managers remember to make these important adjustments when calculating service rates. These rate templates will allow you to adjust bad debt expenses out of rates charged to internal customers, while continuing to recover those costs in separate external customer rates. Service centers with no external customers should not see account code 186100 - Bad Debt Expenses on their 3E funds. In addition to removing bad debt expenses from internal rate costs, the end of year fund balance related to internal customer activity must also be adjusted to exclude the current year’s bad debt expenses. This is necessary to ensure that bad debt expenses do not inadvertently get carried into internal rates through the assessment of an over / under recovery adjustment. Since rates may be calculated biennially in accordance with the federal requirements, it may be necessary to adjust 2 years of bad debt expense from the fund balance.As the dollar amount of receivables increases or decreases each year, the corresponding allowance for uncollectible accounts and bad debt expense are adjusted accordingly. Therefore, the allowance is cumulative each year and the bad debt expense posted is only the incremental amount to adjust the allowance for uncollectible accounts balance. For rate calculation purposes, once the fund balance for the internal customers has been adjusted for the current year’s bad debt expense, subsequent adjustment for the expense should not be necessary. An overarching principal for rate calculation is that only costs which benefit customers of a line of service may be charged to those customers. Credit card transaction fees are another example of expenses that benefit external customers but provide no benefit to internal customers. Therefore, the same adjustments described above for bad debt are necessary to properly handle credit card transaction fee expenses. ContactIf you have questions about calculating compliant rates feel free to consult System Government Costing’s Who to Ask list to find an expert who can help.