Which is the best method to create provision for doubtful debts? % of debtors or % of sale method? why?
Answers:
The allowance for doubtful debts is usually made base on a review of the aged book of accounts receivable. Situations that may require the establishment of an allowance:
a. A receivable will not be totally collected
b. A debtor have file for bankruptcy
c. An estimate should be base upon the aged receivables over 180 days delinquent and the receivable is deem uncollectible
The above assumes that someone in actuality looks into individual debtor balance. If at hand are too abundant debtors to allow this method of making allowances, some companies use the following method, but it is still base on the aged fact list of AR. For e.g. a company could arrive at the amt for the allowance by applying the following percentage to the break open invoices:
Current - 2%
1-30 Days Past Due - 5%
31-91 Days Past Due - 20%
91-180 Days Past Due - 40%
181-360 Days Past Due - 60%
Over 360 Days Past Due - 90%
The allowance represents the dollar amount of overt invoices specifically estimated to be uncollectible.
Allowance for doubtful accounts is a percentage of sale on statement. Only big companies who hold plenty A/R to carry statistics build an allowance. My company solitary have perchance 20 customers a year most years we collect every single cent we are owed so we don't own an allowance. To read aloud one out of 20 customers won't compensate wouldn't be true, dictum 2% of sale don't reward wouldn't be true. They respectively spend roomy amounts to repair ships of they don't repay the coast guard arrest the boat and we auction it stale.
If we be a retail store that have millions of customers approaching Sears you could go and get a statistic truism how much you write past its sell-by date a year as a percentage of A/R so set up an allowance. The number of customers not be a indication of the amounts that will be written bad since some customers might singular owe a few dollars where on earth others will owe thousands and most little ones will probably pay envelope.