MANAGEMENT ACCOUNTING

PROF. BEN GALLEVO

“PRODUCTION METHOD”
-BAD DEBTS
 
JOJIMAR S. JORDAN
 What are Bad Debts – Meaning and Methods to Calculate Bad Debts
 October 18, 2019 By Hitesh Bhasin Tagged With: Management articles
 When an account or trade receivable i.e. a debtor turns uncollectible, it is termed as bad debts. It
means he doesn’t pay the money due.
 Businesses that give credits or loans to customers should always have a contingency plan, as such
credits incorporate the risk of becoming bad debts.
Introduction to the Bad Debts Concept

 One of the most important ways of making sure that the

impromptu purchases are a part of your business is to extend
certain credit to the customers. This way. The business
makers will be able to boost their sales and then also increase
the profits that they want to have.
 However, there are some unfortunate cases where the
customers aren’t able to pay off the credit, and that can be a
problem in most of the cases.
 bad debt and how it can affect the business. For those who
want to know about the bad debt, this is the perfect place to
be.
What Exactly are Bad Debts?
 Ad by Value impression- Hence, you are not able to collect the money that
the customer owes you. The debt will become a bit worthless, and you will
not be able to collect the money that the person owes you.
 So, in a way, you will have to write the debt as something that is
uncollectible.
 In the business world these days, it is a very common scenario that happens
when they are extending large amounts of credit to the customers, and in
the process, chances of bad debts also keep on increasing
Example of Bad Debts
 Let us begin by saying that you made a proper sale with the customer for about $800. However, the customer
makes use of the store credit that is provided by the business that you have.
 After offering an invoice to the customer again and again without really getting the payment back, you realize
that the debt that you owe them has then become a bad one. Some creditors are able to provide the bad debt
on account of yours.
 In case you are not paying the money for some purchases that you make from a vendor, then the vendor will
have a bad debt, which is not paid on time.
 Ad by Valueimpression
 When we talk about the reason for the bad debts, it can be said that there are many different reasons for that to
happen.
 The customers might not have the money to pay the debt that they have. Also, there are some cases when the
customers are not really happy with the products that they have been provided with, and then they might
refuse to pay for the services and the product.
Key Reasons for Bad Debts Occurrence
 Because of the bad financial management of the debtors, they could not pay the debt timely
 Because of the unwillingness of the debtors, bad debts occur more frequently
 Because of the inability of the creditors in collecting the debts
 Because of some sorts of dispute or issues between both the parties due to delivery, price, credit term,
product and so on
 Because debtor has declared the bankruptcy
 Because choosing collection attempts may cost more than the debit
 In addition, when any businesses write off bad debt as an expense, it further
When Does A Debt Become A Bad One?
It can be a difficult thing to find out the exact time when a particular debt will turn into a bad one.
 You might think that there is a switch which will change a particular debt into a bad one, but that is definitely
not the case. But in order to find out whether the debt of yours is a bad one or not, there are some things that
you can try out. 
 In some cases, the vendor might just exhaust all the options for the customer to pay the amount back and in
such cases, the debt that is on the vendor can actually become a bad debt for sure.We have an example here
that would prove the point that we are trying to make here. Say you have made several attempts in order to
make some contact with the customer and it doesn’t have any response from the other end.
 Ad by Value impression- Also, there are some cases where you might have offered some sort of negotiation
for the payment as well. However, the debt payer doesn’t really want to pay the money that you owe them.
These are some of the cases when you can consider that your debt has turned into a bad one, and this is the
time to consider your money as uncollectible.
 Reduces the taxable income of that business.