In business, hands do not always change money immediately after the transfer of the goods or services being accompanied. Most companies often sell their products to customers on credit. The product is sold, an invoice is sent to the customer and the customer pays the purchase price within a certain time. By using this model, there is an inherent risk of client standard. These values should be properly recognized as expenses by the seller, and an allowance must be maintained for non-payment of the so-called delinquent accounts. To take into account dubious debt is to record this command correctly.
1 Register the entry in the general newspaper to recognize a sale on credit. Accounting for the sale of questionable debtors assumes credit, so it starts with the sale in the general newspaper. For example, consider a company that offers $ 2000 service to a client on credit. To record the journal entry, the company creates a $ 2,000 debit in debtors and $ 2000 service credit revenue.
- 2 Estimate the portion of debtors that will be irrecoverable. When you sell goods or services on credit, a company is not likely to be able to collect all the money owed – some clients will fail (they will not pay). To justify this, a reserve account must relate to the irrecoverable amounts.
- One method of estimating the bad amount is using a percentage of total sales. For example, a company can revise historical data and determine that 2 percent of its sales will be withdrawn from credit.
- Another method involves creating an outdated account receivable program. This is a more complex process that uses historical data to determine the likelihood of payment, based on the number of days of default on an invoice.
- 3 Record the entry in the newspaper to create the issue of dubious accounts. In the previous example, suppose the company decides to estimate the bad debts as 2 percent of the total revenue of the service. The award is therefore required (0.02 * 2000), or $ 40. To sign the diary entry and set the teaching bill, the company owes bad debt costs by $ 40 and credits a bad debt fee $ 40
- The bill for bad debts is an anti-asset account. Your balance is deducted from accounts receivable to come to what is known as “net executable receivables.”
- The expense is recorded immediately, according to the congruence principle. Although this customer can pay very well, the expense is recognized to suit your corresponding income.
- 4 Adjust the balance of the quota account as needed. If the company registers another $ 10,000 in service revenue, another journal entry is needed to increase the reserve account. The company owes bad debt expenses for $ 200 and credits a bad debt fee of $ 200. The rest of the reserve account is now $ 240.
- 5 Record the chair in the daily diary to recognize a bad account. When an individual account is identified as irrecoverable (for example, if the buyer went bankrupt and lost all its assets), a note is needed in the journal. In the previous example, suppose a $ 100 balance of the client’s account was considered irrecoverable. To cancel, the seller deducts a fee for questionable debtors of $ 100 and credit debtors of $ 100. Thus, the balance of the allowance account is used essentially to cover the fall of debtors.
- The operations of the previous sample will work just as well when expressed in other currencies.