 |
 |
|
|
Doubtful debtsWe often hear about doubtful debts, especially in relation to various types of financial institutions like banks etc. The doubtful debt is that debt which occurs when all the measures to collect the debt have been resorted to, but the debt remains outstanding. Thus, it can be said that the doubtful debt occurs when all the efforts of the creditor have failed to bear any results and the matter is then passed on to the various solicitors to expedite the matter in the legal way. It is important to note here that many borrowers of the bank do not repay the debt in time, and despite the regular efforts that are made by the financial institution, there is no response from the borrower. There are of course many aspects related to doubtful debt that need to be understood. Let us discuss these next.
VARIOUS RELATED ASPECTS OF DOUBTFUL DEBTS
First of all, as is seen generally, a person should not consider doubtful debts as bad debts as there is different between the two. The doubtful debt is that part of debt that is recorded under the expense head of the financial institution like bank etc. It is important to note here that the debt is classified as the doubtful debt only when all the measures of collection have failed and also the collateral or the security available with the bank etc is not enough to cover the amount outstanding. Since there is no way out other than the legal recourse which takes a long time, the bank or any other such lender transfers the whole amount of such debt under the category of doubtful debt, which ultimately is recorded as an expense. One of the most important aspects that need to be understood here is that, since the doubtful debts are recorded under the expenses in the profit and loss account, the doubtful debts make a great impact on the profits of any banking institution or any other such institution. Bad debt, on the other hand, is that doubtful debt which is written off from the records of the bank. The bad debt is also called as the loss assets in banking terminology and the doubtful debt becomes bad debt when there is no possibility of collection of debt at all.
WHY THE DEBT SHOULD BE CLASSIFIED AS THE DOUBTFUL DEBT?
There is of course a reason for which the debt is transferred under the category of doubtful debt. This is provisioning. The provisioning is a way by which various types of financial institutions like banks etc keep a certain amount of sum regarding the outstanding doubtful debts, which is then recorded under profit and loss. This is done so that doubtful debts can easily be transferred into the bad debts accounts and then they are written off from the balance sheet of the financial institution. As far as the provisioning is concerned, there are many ways of provisioning that are adapted by different financial institutions. Regarding the provisioning of doubtful debts by the financial institutions, it is important to understand here that these provisioning norms are applied as per the instructions of the controlling authority of these institutions. In most of the cases, the various provisioning norms are provided by the central bank of the nation or any other such department authorized by the central or federal government. It is also important to note here that these provisioning norms are same for all the financial institutions in the nation so that these institutions arrive at profit or loss by applying the same standards of provisioning. Let us now discuss the different ways in which the provisioning is applied to the doubtful debts. The first way in which the provisioning is applied to the doubtful assets is by the method of general provisioning. In this type of method, the provisioning is applied as the percentage of the closing balance in the loan account.
This is also called as the general provision method for doubtful assets. Since there is not identification of specific trade debtors, there is a generalized provisioning in this method. The estimate made with respect to the doubtful debts is purely based upon the past trends in the industry. The other method that is widely used for the application of provisioning in the doubtful debts is the provisioning based on the whole year earnings. The provisioning is of course applied as the percentage of these earnings. The estimated whole year billing is taken into account for knowing the amount on which the provisioning is done. As far as the estimated amount is concerned, in this method also, it is based upon the management in-depth or the past trend understanding, as in the above type of provisioning method. Other method that is used for the provisioning of the doubtful debts is the method of specific provisioning by the identification of the customers that turns bad. It is very important to understand here that the term specific means identifying the individual debtor. This is done by way of reviewing the individual accounts of various debtors. It is also important to note here that unlike the above methods of provisioning, this method is based upon the documentary evidence like the investigation and litigation of the debtors that are turning bad. Apart from all of the above, the provisioning is also done by way of ageing schedule. In this type of provisioning, the management is presented with all the debtors along with the age of debt lying outstanding. Based upon the policy of the company, provisioning is done accordingly.
After reading the above discussion, it is obvious that the management of doubtful debts is very important, because these make a serious impact on the profit of any organization if not recovered. There are various ways in which the provisioning is done with respect to doubtful debts and it differs from one country to another.
Other Articles
|
