What is Book Debt Certificate?
A Book Debt Certificate is a formal document, typically issued by a Chartered Accountant (CA), that verifies the accuracy and existence of a company’s outstanding receivables (money owed by customers) as recorded in its books of account.
In the financial and banking sector, “book debts” (also known as trade receivables or accounts receivable) are considered current assets because they represent future cash inflows. Banks and financial institutions often require this certificate to assess a borrower’s creditworthiness or to calculate the “drawing power” for loans like cash credits or overdrafts.
Book Debts
If you run a business which offers goods or services to clients, then you’ll deal with book debts on a daily basis. Every enterprise carries book debts in their balance sheet as part of their ordinary course of business – and ensuring these are paid in a timely and efficient manner is fundamental to the successful running of any organisation.
Book debts’ meaning in accounting is largely similar to that of accounts receivable, however there are differences between book debts and receivables generally. In this guide, we’ll look at exactly what book debts are, how they differ from wider receivables and what you can do when they’re not being paid consistently.
What are book debts?
Book debts, by definition, refer to money due to a company in the ordinary course of its business. Book debts are primarily made up of sums owed for goods or services supplied or work carried out on credit. Any sum due under a loan may also be treated as a book debt. Book debts in the balance sheet are classified as assets.
On a general basis, book debts can be considered as or confined to accounts receivable i.e. the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. There have been some examples within legal frameworks of accounts receivable being different to book debts, however these differences tend to be an area of debate between varying definitions and interpretations of the two.
Key Components of the Certificate
A standard book debt certificate usually includes:
- Total Sundry Debtors: The total amount owed to the business.
- Age-Wise Classification: A breakdown of debts based on how long they have been outstanding (e.g., less than 90 days, 91–180 days, or more than 6 months).
- Eligible vs. Ineligible Debts: Deductions for “bad” or “doubtful” debts, or those older than a specific period (often 6 months), which banks may not consider as valid security.
- Verification Statement: A declaration from the CA stating they have examined the accounts and the debts arose from genuine business transactions.
- UDIN (Unique Document Identification Number): In countries like India, CAs must include a UDIN to ensure the document’s authenticity.
Why is Book Debt/ Accounts Receivable Certificate Required?
- Loan Sanctions & Renewals: Banks use it to ensure the collateral (the receivables) is sufficient to cover the loan amount.
- Drawing Power Calculation: The limit a business can withdraw from a bank is often tied to the value of its “good” book debts after a certain margin is deducted.
- Quarterly/Monthly Compliance: Borrowers with high credit limits (e.g., above ₹50 Lakh) may need to submit these certificates monthly or quarterly to maintain their credit line.
- Debenture Compliance: For listed companies, certificates may be required by debenture trustees to confirm security cover for bondholders.
What are Invoice Receivables?
Invoice receivables also referred to as accounts receivables, are a legally enforceable claim for payment by a business for goods supplied and/or services provided, for which they are awaiting payment. Usually these are in the form of invoices raised by a business and sent to the customer for payment, within an agreed time frame. Invoice Finance, usually calculated based on invoice receivables, is a financial product that allows businesses to unlock the cash they have tied up in unpaid invoices. Rather than being deemed typical lending, it is seen as more of an asset purchase as a business can raise money against its debtors.
There are two types of invoice finance: Invoice discounting and factoring.
Invoice discounting is essentially an asset-based financial product that allows businesses to access money tied up in outstanding invoices by selling them for a payment equivalent. Invoice finance is a type of asset-based lending – the book debt (also known as the sales ledger) is the asset against which the funding is lent.
It is the alternative solution to business finance that SME’s are using to help manage cash flow. For businesses, especially SME’s, this is a lifeline that is often needed. It enables businesses to access funds immediately after raising an invoice, rather than having to wait for their customers to pay.
Most businesses tend to prefer this option as the invoice finance company does not take on the responsibility of handling the sales ledger management, which includes the collection of invoices and can jeopardise relationships with customers if outsourced.
Secondly, there is invoice factoring. This is similar to invoice discounting, however the difference between the two is that discounting means a business handles their own sales ledger management, credit control and collection of invoices.
What’s the difference between book debts and receivables?
Book debts are typically current assets that arise from selling goods or providing a service to customers on credit. Book debts, or account receivables, are also considered trade receivables. While book debts come under the umbrella of receivables as a whole, wider receivables can also include nontrade receivables, which appear on the balance sheet as other receivables.
Examples of nontrade receivables include interest, income tax, insurance claims and receivables from employees. None of these are considered book debts, which is where the fundamental difference lies. Bad debts and doubtful debts are also not classified as book debts.
Support options surrounding book debts
It should come as no surprise that regular and consistent realisation of book debt assets is vital to maintaining your cash flow. If you are struggling to collect outstanding book debts, or you run into administrative issues relating to book debts, there are a number of services and funding solutions available to you.
