The principle of matching is the basis for accrual accounting and revenue recognition. According to the principle, the total cost of revenue should be deducted from the proceeds of the same period. This principle allows a better assessment of actual profitability and performance and reduces the difference between cost accounting and revenue recognition. Claims in which related sales revenue are accounted for include debt claims as receivables.
Receivables are amounts payable by customers for money, services, or merchandise purchases. In the balance sheet, current or non-current assets are accounted for based on the expected length of time for collection. Most of the receivables are receivables arising from the sale of the goods or services belonging to the buyers.
To increase their sales revenue, the company extends loans to its customers. Credit lines are causing your customers to buy. But if the company provides credit to a client, there is a risk that the customer will not return. In order to eliminate the risk, the company sets up some guidelines and guidelines for providing credit to its client. A credit check is carried out to assess the customer's creditworthiness. A collection policy has been set up to ensure that they receive payment in time and reduce the risk of default. Unfortunately, there are still sales that can not be collected. Or the customer goes away, unhappy with the provided service or simply refuses to repay. The company has a legal remedy to try to collect its money, but it is often unsuccessful and costly. This bad debts is a revenue loss recognized by fixing a bad debt ratio. As a result, it has become necessary to establish an accounting procedure for measuring and reporting these non-computable accounts.
There are two methods for recording a bad debt ratio. The first method is the "Direct Accounting Method" and the second is the "Allowance Method"
The direct settlement method is a very weak method and does not apply the principle of revenue and revenue detection in the same period. This method requires bad debts only when a company has done its best to collect the amount of the debt and ultimately declares it irreconcilable. It has no effect on income because it simply reduces the claim to the net realizable value.
This is a simple method, but only acceptable if the company does not have an accurate way to estimate the value of bad knots during the year, or bad debts are irrelevant. In accounting, an item is considered a substance if it is large enough to affect the judgment of financial users. With the direct description method, several accounting periods have elapsed before they are finally determined to be irrefutable and write down. Revenue from credit ratings shall be recognized for a period but the costs of accounting for such sales shall not be recognized until the next accounting period. Consequently, revenues and expenditures are incompatible
. The Allowance method is a good way to eradicate a bad debt ratio. This method meets the generally accepted accounting principles. Claims are presented in the financial statements at the net realizable value. The net realizable value is equal to the gross amount of the receivables and the estimate of the doubtful receivables. This is often called a replacement for bad debts. This is a counter-balance account in the balance. This counterparty account has a normal credit balance instead of the debit balance because it is a deduction of receivables. The Bad Debt Account Grant informs the financial user that some of the receivables are not expected to be available. The benefit method allows you to estimate the amount of time-based loan sales or receivables.
The value of bad debt as a percentage of sales is consistent with the same concept as the bad debt was recorded over the same period as the related revenue. This fixed percentage of debt from the period provides for bad debt debt in the income statement. Trends or patterns of credit sales in previous years and associated bad debts are the basis for a reasonable estimate or projection of bad debts for the current year
On the basis of receivables, when estimating impairment, a company can estimate an aging calculation or a single calculation based on all accounts. When using an estimate based on claims, a bad debt ratio log entry must take into account the balance of the current account. The amount of the entry is the amount necessary to bring the balance into the benefit account for the amount of the desired final balance
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