Bad debt is an amount owing from a debtor which is not expected to received.In business, debts become irrecoverable owing to various reason, namely, insolvency, willful non-payment,and like that.Though bad debt us a loss to the business, it is treated as an operating expenses of doing business, since it is inevitable to any business that extend credit to its customers.
It can be argued that the transfer of bad debts to profit and loss account should be made in the year in which the sale took place as only such treatment will conform to the matching concept.But it would be possible though difficult to reopen the earlier period's accounts but this is seldom done in practice.
Provision for bad debts
At the end of each accounting period, the firm knows that it will suffer a loss due to bad debts in future.An accurate estimate of the apprehended bad debts losses can nevertheless be made, because the firm does not know which debtor will fail t make payment in future.Therefore, the book value of sundry debtors may not be the actual realizable value.
Towards the endeavour of ascertaining the true (or fair) trading profit,a portion of profit is set aside in a special account called 'Provision for Bad and Doubtful Debts' to adjust the loss of future bad debts which is based on approximations.But we cannot write off the accounts of doubtful debtors at once, the value of the sundry debtors cannot be reduced directly.This is so because there may still a chance of recovery (Partly or fully) of debt.
The estimate doubtful debts (Provision for Bad and Doubtful debts account) is shown as a separate figure in the balance sheet
It can be argued that the transfer of bad debts to profit and loss account should be made in the year in which the sale took place as only such treatment will conform to the matching concept.But it would be possible though difficult to reopen the earlier period's accounts but this is seldom done in practice.
Provision for bad debts
At the end of each accounting period, the firm knows that it will suffer a loss due to bad debts in future.An accurate estimate of the apprehended bad debts losses can nevertheless be made, because the firm does not know which debtor will fail t make payment in future.Therefore, the book value of sundry debtors may not be the actual realizable value.
Towards the endeavour of ascertaining the true (or fair) trading profit,a portion of profit is set aside in a special account called 'Provision for Bad and Doubtful Debts' to adjust the loss of future bad debts which is based on approximations.But we cannot write off the accounts of doubtful debtors at once, the value of the sundry debtors cannot be reduced directly.This is so because there may still a chance of recovery (Partly or fully) of debt.
The estimate doubtful debts (Provision for Bad and Doubtful debts account) is shown as a separate figure in the balance sheet
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