Monday, December 7, 2009

ALLOWANCE FOR UNCOLLECTIBLES, WHY NECESSARY?

COMPANIES DO CASH AS WELL AS CREDIT TRANSACTIONS(SALES). CREDIT SALES ARE DONE IN ORDER TO INCREASE PROFITS AND REVENUES. WHEN A COMPANY DOES A CREDIT SALE IT IS QUITE POSSIBLE THAT IT WILL BE UNABLE TO RECOVER 100% CLAIMS THAT IT OWS TO ITS DEBTORS. THESE NO RECOERED AMOUNTS ARE TERMED AS DAB DEBTS. I WOULD LIKE TO USE COCEPT OF "MUKHERJI,an Indian author" here. EVERY COPMANY RECORDS ITS CREDIT TRANSACTION IN ITS SALES DAY BOOK BY MAKING AND PRESENTIN DEBTORS BY THEIR PARTICULAR NAMES. ALL ACCOUNTS RECEIVABLE S ARE ADDED TO GET A FIGURE AND IS TRANSFERRED TO JOURNAL BY THE NAME OF "SUNDRY DEBTORS". ITS QUITE POSSIBLE THAT LATER OWN A BAD DEBT CAN BE RECOVERED. ACTUAL PROBLEM AND NEED FOR ALLOWANCE ARISES HERE BECAUSE WHEN A DEBT IS RECOVERED IT BECOMES QUITE DIFFICULT TO LOCATE AND MATCH THE RECOVERED AMOUNT AGAINST DUE DATE AND ADJUSTMENT AGAINST THE DEBTORS ACCOUNT FROM WHOM IT IS RECOVERED.. TO AVOID ALL THIS ALLOWANCE OR PROVISION FOR DOUBTFUL DEBTS IS ESTIMATED USING THE FOLLOWING TWO WAYS,BALANCE SHEET APPROACH(AGING METHOD).INCOME STATEMENT APPROACH(PERCENTAGE ON NET DEBTORS METHOD). THIS PROVISION OR ALLOWANCE IS A CONTRA ASSETACCOUNT. IT HAS OPENING AS WELL AS CLOSING BALANCES. IN PROFIT AND LOSS ACCOUNT IT COMES UNDER OPERATING EXPENSES AND IN BALANCE SHEET IT IS DEDUCTED FROM DEBTORS FIGURE UNDER THE HEADING OF CURRENT ASSETS.

2 comments:

abdul... said...

I have heard the term "sundry debtors" for the first time, wasim would u plz tell me something more about it.

M. Umer Toor said...

Very well related to marketing concepts.