bad-debt losses

(noun)

losses resulting from an uncollectible debt.

Related Terms

Examples of bad-debt losses in the following topics:

  • Setting a Credit Policy

    • A restrictive policy will most likely result in lower sales, but the firm will have a smaller investment in receivables and incur less bad-debt losses.
    • Less restrictive policies will generate higher sales as well as a higher receivables balance, but the company will most likely incur more bad-debt losses and a high opportunity cost of holding capital in accounts receivables.
    • Potential losses not only include the selling price, but can also include disruption to cash flows and increased collection costs.
    • Character: Is the borrower trustworthy with a history of meeting its debt obligations?

  • Collecting Receivables

    • A collection agency is a business that pursues payments of debts owed by individuals or businesses.
    • First-party agencies are oftentimes a subsidiary of the original company to whom the debt is owed.
    • Third-party agencies are separate companies contracted by a business to collect debts on their behalf for a fee.
    • A company may protect against bad-debts losses by purchasing trade credit insurance.
    • This is an example of a letter from a collection agency offering to settle a debt.

  • Dealing with Foreign Currency and Bad Debts

    • To deal with foreign currency and bad debts, we have a "gain or loss" account and methods to measure the net value of accounts receivable.
    • The allowance for bad debt/doubtful accounts is a permanent account.
    • While the corresponding bad debt expense account is a temporary account that is zeroed out annually.
    • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement .
    • Explain how the "gain or loss" account is used for foreign currency transactions and bad debts

  • Valuing Accounts Receivable

    • These uncollectible accounts are called bad debts.
    • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
    • For tax purposes, companies must use the direct write-off method, under which bad debts are recognized only after the company is certain the debt will not be paid.
    • Recognizing the bad debt requires a journal entry that increases a bad debts expense account and decreases accounts receivable.
    • The adjusting entry to estimate the expected value of bad debts does not reduce accounts receivable directly.

  • Accounting for Sale of Debt

    • Once the company sells the bond, it must report any gains or losses on the sale of the debt.
    • The unrealized loss would be included on the company's income statement for the period it was recorded.
    • Because both the loss and the decrease in the debt asset's value were already recorded in the prior accounting period, the company would not have to make any additional adjustments.
    • Returning to the example, assume that the debt asset is sold immediately after the end of the accounting period where it first recognized the unrealized loss.
    • The debt asset, as well as the unrealized loss, is removed from the company's books.

  • Recognizing Accounts Receivable

    • If so, you can either charge these losses to expense when they occur, known as the direct write-off method, or you can anticipate the amount of such losses and charge an estimated amount to expense, known as the allowance method .
    • Since not all customer debts will be collected, businesses typically estimate the amount of and then record an allowance for doubtful accounts which appears on the balance sheet as a contra account that offsets total accounts receivable.
    • Two methods are available to calculate the amount of bad debt expense and allowance of doubtful accounts at the end of an accounting period -- percentage of accounts receivable or percentage of sales.
    • To adjust the allowance account for the new estimate, debit Bad Debt Expense for USD 500 (10,000 *0.05) and credit Allowance for Doubtful Accounts for USD 500.
    • To adjust the allowance account for the new period's estimate, debit Bad Debt Expense for USD 2,000 (20,000 *0.10) and credit Allowance for Doubtful Accounts for USD 2,000.

  • Recognizing Notes Receivable

    • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
    • The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision).
    • The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.
    • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
    • The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation. )

  • Problems of Long-Run Government Debt

    • Government debt limits future government actions and can be hard to pay off because Congressmen are unwilling to do what is necessary to pay down the debt.
    • The problem with debt is that it must be paid off with future revenues.
    • To pay off the debt, the government must maintain a certain level of income.
    • If a country has a bad credit rating, it generally must have a higher interest rate on the debt it issues.
    • This means it will be more expensive for that country to raise funds by issuing debt.

  • Regulatory Oversight

    • Basel committee wanted to ensure banks had enough capital to survive a financial crisis and avoid massive profit losses.
    • The Federal Reserve bought many of the toxic mortgage loans from the banks, removing the bad debt from their books.
    • Leverage, in our case, equals the ratio of debt a business uses to acquired assets.
    • Many banks accumulated debt to acquire properties at the peak of the housing bubble.
    • Once the bubble deflated, the property fell in value, and the banks could not sell it without enormous losses.

  • Valuing Notes Receivable

    • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
    • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
    • The amount of the bad debt provision can be computed in two ways:
    • by reviewing each individual debt and deciding whether it is doubtful (a specific provision)
    • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.