Whenever we realize a certain amount due is a bad debt then the accounting principle needs us to write off that amount and Mark a double entry crediting amount receivable to nil and debit bad debts. This will ensure to write off the bad debt as no amount is now expected to be received.
Bad debts also get recovered sometime that is like an amount marked as bad debt gets paid back unexpectedly. In this case it is important to cancel to impact of the entry that was made for writing off the bad debt.
Doubtful debts understanding
A doubtful debt is an amount that the firm or an individual is not expecting to receive and hence creates a provision for that. It’s certainly not a bad debt as of now but only a doubtful debt which might or might not be a bad debt. Hence there is a doubt that it might be a bad debt in future. This is also one of the foresight in accounting which is very important to prepare for future.
In accounting, such provisions are created as part of accrual accounting. These are some probable expenses that are expected to be incurred in form of Non realized money. It’s actually helpful and provides an advanced indication about the upcoming Bad debt.
Definitely it helps in safeguarding the company financial stability. Thus to protect company’s financial health One must be aware and conscious of the doubtful debts. These are the risks which are required to be identified for their impact to be mitigated. To estimate it one company might use a percentage of total sales method while other one uses individual risk analysis.
Proactive Measures to Avoid Doubtful Debts
It is also important that we must try to avoid getting into situation where we have to create such provisions. We must be careful about who we are dealing with, what is their track record, what is their market credibility etc. We must do the credit risk assessment of our prospective buyers and only deal with reliable business set ups.
We must also have legal contracts that should state payment timelines and conditions with penalties. Strong mechanism to track and solve late payments through policies also helps Overall functioning, awareness, pro creativeness, good relations, strict adherence to trade policies will bring that influential and positive difference in any business with respect to doubtful or bad debts.