Doubt Full or Bad Debt (English to Urdu translation)
Doubtful or Bad Debt (English to Urdu translation)
Introduction:
The topic covers the following:
Provision / allowance for doubtful Debt
Sales and purchase of goods on credit basic is one of the marketing techniques in this modern business era. As it is different form sales and purchase on cash basic so it creates new issues like bad Debt. Discount for debtors, early payment and discount received from creditors by paying them earlier than the deadline. As our financial statements are prepared on some accounting concepts like accrual and prudence so ‘it is very difficult to calculate exactly what this problem the concept of provisions / reserves evolves.
PROVISIONS ASSOVIATED WITH DEBTORS:
Normally two kind of provision are made for debtors which are provision for doubtful Debt and provision for discount on debtors. Now we shall discuss them one by one.
PROVISION FOR DOUBTFUL DEBTS:
At the end of each accounting period the firm knows it will suffer a loss due to bad debts in future an accurate estimate of the apprehended bad Debt losses can nevertheless be made because the firm does not know which debtor will fail to make, payment in future.
Towards the endeavor of asserting the true (or fair) trading profit a portion of the profit is set aside in a special account called province for doubtful Debt to adjust the loss of future bad debts which is based on approximations . The estimate of doubtful Debts Provision for doubtful debts) is shown as a separate figure in the balances sheet.
First of all to will be more convenient for us to know about bad debts and why it occurs.
WHAT are bad debts and why they arise?
‘’’ BAD DEBT IS AN AMOUNT OWING FROM A DEBTOR WHICH IS EXPECTED NOT TO BE RECEIIVED ‘’’
Bad Debt is a kind of operating loss to the business arises due to non-payment of debtor we know debtor is a person who has to pay to the entity against goods purchased or services taken.
How there is a question arise if we know there is probability of bad debts then why we sell of render services in credit basic ?
Answer to this question is modern era of business is quite simple we know now a days there is dug competition among different entities regarding their goods and services their main objective is to boost up the customer attention customer gets the desired goods and fulfill his current need . no matter whether he has money now to pay it or not .
On the other hand credit sales also has greater profit margin then routine cash basic sales some is to cover op additional administrative work and Debt collection charges and some in for extra profit.
Estimation of province for doubtful Debt:
The extent of non-payment of Debt varies from industry to industry there are three method of estimating bad debts to be provided for.
Debt review:
When the size of the organization is small and the accountant has firsthand knowledge of the financial condition of all the debtors. than this method of estimating the bad Debt is most effective. Under this method. An analysis sheet is prepared by considering each individual Debt. in the analysis sheet .debts are classifieds into.
1 Good debts
2 Doubtful debts
Provision is made for the amount equal to the aggregate of depts…
Probability of non-collection
When the size if the organization is very large and the number of customers is numerous .than it is not possible to predict which individual customer will fail to pay in future? In such a situation. It is possible to make an analysis of past experience and fix up probability that some proportion of debtors will fail to pay . Applying this probability to the amount of debtors outstanding at the end of the period, the applying this probability to the amount of debtors outstanding at the end of the period, the estimated bad debts can be obtained.
Percentage of sales
Another method of estimating bad debt is based insoles. Under this method .a certain percentage of sales is estimated to become bad and provision is created on that noses the percentage is calculate ed on sales minus returns and allowances.
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