business bad debt: What Exactly Is This ?

2008-03-06 14:57:21

( Financial )



What is bad debt or business bad debt? It is a debt which cannot be collected. So bad debt collection is pointless because it is of no value to the creditor. Business bad debt occurs when every effort has been made for the collection of the debt. Business bad debt usually occurs when the debtor has gone bankrupt or where pursuing bad debt collection makes no sense because the cost this would entail is higher than the debt itself. Once debt is considered business bad debt the company writes it off as an expense.

How is credit linked with bad debt?

Most companies will sell according to credit because this way they can increase their sales. Though sometimes they will sell to people who have credit that is less than desirable. Companies making credit sales estimate how many sales they might lose because of bad debt due to doubtful accounts. A debtor who has a bad debt history will have a declining credit rating. This means that if you have bad debt it is difficult to get additional credit.

Corporations and banks and bad debt
These simply open loan receivable or account balance, which has proven uncollectible, and they write it off. Traditionally what financial institutions and companies do is maintain a reserve for accounts that are uncollectible and they charge the reserve for bad debts and make tax deductible charges annually to income in order to increase or replenish the reserve. Large banks and companies usually have to utilize a direct charge-off for tax purposes. However the bad debt reserves are still seen on balance sheets for purposes of reporting. Thrift institutions and small banks still use the reserve method for purposes of tax, through this is subject to strict limitations. The relationship between recoveries to accounts receivable and bad debt write-offs demonstrate how conservative or liberal a company’s charge-off and credit policies are.


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