Accounting & Bookkeeping & Small Business Forum

[mdar]

Can anyone please explain two factors a business should consider when setting a provision for bad debts?

[stasia2003]

mdar wrote: Can anyone please explain two factors a business should consider when setting a provision for bad debts?

I presume you are talking about uncollectable accounts receivables. You can base your estimate on last year's uncollected accounts. Take the amount not collected and divide it by the sales. Whatever that percentage is, that's what you can use as your measuring stick for the subsequent year.

[mdar]

thanks

[Richard Noot]

mdar wrote: Can anyone please explain two factors a business should consider when setting a provision for bad debts? First of all bad debts are taken into consideration when the business is on the accrual method and not the cash method.An amount is usually based on historical figures if the business has been in existence for a period of time. If not, then the amount is based on past due amounts over a certain number of days. Usually 90 days 100 days or 120 days.

[mdar]

So the two concepts are :

Prudence concept
Accruel concept

Please confirm

[Richard Noot]

mdar wrote: So the two concepts are :

Prudence concept
Accruel concept

Please confirm Sorry. I have never heard of those terms in regards to bad debts.

[stasia2003]

mdar wrote: So the two concepts are :

Prudence concept
Accruel concept

Please confirm

What country are you in??? Under U.S. GAAP, there is an accounting concept known as the "accrual method" but not accrual concept. The only prudence I know about is Jurisprudence and that has nothing to do with accounting. :?:

[Dominic Bradish]

Maybe by prudence concept, you mean conservatism? That would mean that given several justifiable alternatives is estimating an allowance for bad debts(and other issues), the accountant should choose the one that has the most adverse impact on reported net income.