bad debt

Examples of bad debt in the following topics:

• Valuing Accounts Receivable

  • These uncollectible accounts are called bad debts.
  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
  • Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable.
  • The adjusting entry to estimate the expected value of bad debts does not reduce accounts receivable directly.

• Dealing with Foreign Currency and Bad Debts

  • To deal with foreign currency and bad debts, we have a "gain or loss" account and methods to measure the net value of accounts receivable.
  • The allowance for bad debt/doubtful accounts is a permanent account.
  • While the corresponding bad debt expense account is a temporary account that is zeroed out annually.
  • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement .
  • Explain how the "gain or loss" account is used for foreign currency transactions and bad debts

• Recognizing Notes Receivable

  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
  • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
  • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )

• Activities to Manage Receivables

  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision) or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
  • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

• Valuing Notes Receivable

  • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways:
  • by reviewing each individual debt and deciding whether it is doubtful (a specific provision)
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

• Classifying Receivables

  • Not all accounts receivables will be paid, and an allowance has to be made for bad debts.
  • The allowance for bad debts can be calculated either as the percentage of net credit sales or by the ageing method of estimating bad debts.

• Defining Accounts Receivable

  • The first method is the allowance method, which establishes an allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • The amount of the bad debt provision can be computed in two ways:
  • By reviewing each individual debt and deciding whether it is doubtful (a specific provision)
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

• Collection from Delinquent Payables

  • Debt compliance describes various legal measures taken to ensure that debtors honor their debts.
  • There are a number of repercussions for debt noncompliance.
  • This occurs when a consumer becomes severely delinquent on a debt.
  • Bad debts and even fraud are simply part of the cost of doing business.
  • Explain the ramifications of failing to repay credit card and loan debts

• Problems of Long-Run Government Debt

  • Government debt limits future government actions and can be hard to pay off because Congressmen are unwilling to do what is necessary to pay down the debt.
  • The problem with debt is that it must be paid off with future revenues.
  • To pay off the debt, the government must maintain a certain level of income.
  • If a country has a bad credit rating, it generally must have a higher interest rate on the debt it issues.
  • This means it will be more expensive for that country to raise funds by issuing debt.

• Return on Common Equity

  • A company with a high ROE does a good job of turning the capital invested in it into profit, and a company with a low ROE does a bad job.
  • However, like many of the other ratios, there is no standard way to define a good ROE or a bad ROE.
  • Thus, a higher proportion of debt in the firm's capital structure leads to higher ROE.
  • So if the firm takes on too much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases.
  • Increased debt will make a positive contribution to a firm's ROE only if the matching return on assets (ROA) of that debt exceeds the interest rate on the debt.