Bad debts

Introduction

As long as companies make sales by credit there will always remain bad debts . Forecasting for bad debts is not easy . The value of bad debts can remain consistent over time and some issues or circumstances could change that and hence increase the pile of bad debt . To get an understanding of bad debts one has to know the many variables as possible , inside and outside , that have an effect on bad debt

Meaning of `Accrual accounting

An accounting method that measures the performance of a company by taking into

account the economic events regardless of when cash transactions occur

The Accrual method of accounting is about matching revenues when they are earned against expenses associated with those revenues e .g , under accrual accounting , if a business receives a bill , that bill is treated as an expense even though it has not been paid . In the same manner , if a customer is billed for an `x ' amount , that bill is counted as income even though the payment has not been received yet

Accrual accounting is considered to be the norm for standard accounting with most companies , with the exception of very small operations . This method provides a more accurate picture of the company 's current condition , but its relative complexity makes it more expensive to implement

This is the opposite of cash accounting , which recognizes transactions only when there is an exchange of cash

The various ways of estimating bad-debts are as follows

i . Allowance method : One way companies...