 |
 |
|
|
Bad debtBad debts can be explained as debts which are irrecoverable. A bad debt is the money that you cannot collect. The occurrence of bad debts has various causes. But the main cause for bad debts is when you provide service on credit basis. In other words bad debts can be also explained as debts which are not collectible, and for that reason, debts become worthless to the creditor. However, in the accounting books, bad debts are considered as an expense. And once it is considered as an expense, it is written off by the company.
There are different types of bad debts, as bad debts reserve and bad debts allowance. Bad debts reserve can be explained as an amount which is set aside as a reserve. Mostly bad debts reserves are related to companies. Companies make an estimate of bad debt expense that they incur in the current time period. Therefore, they keep a separate bad debt reserve for the same. In other words, bad debts can be explained as a reserve that is kept aside by the company in expectation of creditors? non payment. Allowance for bad debts can be explained as a provision for possible non-collectability which is associated with accounts that are receivable.
Apart from this, bad debts which are associated with the credit cards are the worst type of debts. If the interest rate on a particular card becomes high, it causes bad debt. And this causes huge financial crises for an individual. Another reason for cumulative bad debt is, when a person uses debts to finance things that can be consumed which are not accumulated by good debts. Other than this, making excessive purchase in the form of clothes and food through the use of credit cards accumulate bad debts. But as bad debts, levels are rising, it is mandatory to keep a check on managing your bad debts. Many people of U.S and U.K are finding it extremely difficult to keep a check on repayments on their particular unsecured monetary obligation. As a result of which people are now turning to various debt management options to stay away from bad debts. There are various debt management agencies which now look after your financial plans in order to avoid bad debts. There are certain ways, by which bad debts can be avoided, they are:
1. Maintain a credit reference file, where you can store all your credit references.
2. List out all the people you have financial links with, at your particular address, this is important for your reference purpose.
3. Maintain all your credit accounts, from the start and check on the repayments you have made on those credit accounts. Your credit accounts can include your credit card bills, mortgage loans, or hire purchase of your car.
4. Other than this, maintain a record of all the lenders you have taken loan from, this is reference for credit purpose.
The best accounting solution for bad debts is, writing off with terms of your income tax. And matching, the bad debts as against the sales when the bad debts actually accrue.
Other Articles
|
