OFTEN ORGANISATIONS LEND MONEY OR SALES IN CREDIT. IF THE MONEY FOR THOSE LENDING OR SALES DO NOT GET REALIZED IN FULL OR PART WITHIN A SET PERIOD THE UNRELIZED MONEY IS CALLED BAD DEBT.
HOW IT IS RECORDED IN THE BOOK OF ACCOUNT?
IT IS A TYPE OF ACCOUNT RECEIVABLE THAT ARE NOT COLLECTABLE.BAD DEBTS ARE RECORDED IN FINANCIAL STATEMENTS AS PROVISION FOR CREDIT LOSES
EXAMPLE OF BAD DEBT
ANY SERVICES GET SOLD IN POSTPAID TERM LIKE TELEPHONE BILL, IF SUBSCRIBER DO NOT PAY WITHIN A STIPULATED PERIOD THE COMPANY BOOK THAT AMOUNTS IN BAD DEBT.
HOW BAD DEBT IS CALCULATED?
DIRECT WRITE OFF METHOD.
1ST METHOD
IN THIS METHOD, THE BAD DEBT IS DIRECTLY WRITTEN OFF. HERE THE BAD DEBT IS CHANGED TO EXPENSE AS SOON AS IT IS CLEAR THAT IT WILL NOT BE PAID
HOW BAD DEBT IS CALCULATED?
ALLOWANCE METHOD
2ND METHOD
IN THE ALLOWANCE METHOD AN ESTIMATE OF THE FUTURE AMOUNT IS SET ASIDE AS BED DEBT. IT IS A RESERVE FOR BAD DEBT THAT IS EXPECTED AGAINST THE CREDIT SALES.
IMPORTANT ASPECT OF BAD DEBT
IT IS NOT ALWAYS THAT BAD DEBT ARE NEVER COLLECTED. WHEN A BAD DEBT IS COLLECTED THEN A REVERSE ENTRY IS MADE. WHEN ANY WRITTEN-OFF AMOUNT IS COLLECTED IT SHOULD NOT BE TREATED AS A NEW REVENUE.