Bad Debts Accounting: How Bad Debts Can Affect Your Business

In the corporate world, business relations are based on one crucial factor known as “Trust”, based on which an entity ends up dealing with other entities. The involvement of other business entities or individuals is categorised into two halves: debtor and creditor. A business needs to maintain separate records for its debtors and creditors because they need to be tracked at every point. The excess number of creditors and debtors turns out to be harmful to any business. One such effect that arises due to a high number of debtors is bad debt. This article talks about bad debt accounting, which is another segment in accounting, and turns out essential for a business to maintain. Let’s have a look at it.

What is Bad Debt Accounting?

Bad Debt accounting is another segment of accounting that deals with recording and managing the transactions of the bad debtors. When a debtor delays the payment which your business entity should receive on a specific date, but then there exists no hope of recovering the amount, then it is regarded as a bad debt.

Maintaining a separate account for bad debt is important because you will have an idea regarding the revenue that has been frozen. Moreover, you will get an idea as to the number of debtors that your business should hold and shouldn’t. Some of the core reasons for how it can affect your business are as follows:

1. Your Debtors Count Spikes Up

If your bad debt accounting is not managed effectively, you will not be in a position to manage your debtors. Over a while, the debtor’s count would spike up, and it would be difficult for you to recover the amount. A higher number of bad debts will affect the complete working system of your company, and even can turn you to be a bad debtor as you will face issues while paying your creditors.

2. Revenue Gets Stuck

It is understood that the bad debt accounts highlight the complete count of income that is stucked, and it is difficult for you to recover ack. Merging them in the same book of debtors will end up confusing you regarding the payments. So, it is imperative that you prepare a separate book of accounts for the bad debt.

3.Creates Confusion in Tallying Accounts

Non-maintenance of the bad debt accounting might end up confusing you with the other accounts. There might be an error in tallying the reports, and it might be a tedious process to clear it at that point of time. So, it turns out to be a smart option to manage a separate account for bad debts, which will help you to understand the bad debts accounts clearly.

4. Budget Gets Affected

If you have a high number of debtors who are getting converted into bad debts over a period of time, it will turn out to be very difficult for you to manage your financial budget, and you will not be in a proper position to manage your company’s financial condition.

5. Audit Score turns out to be Less

The audit process does scrutinize the complete company books. In case, if you don’t maintain a bad-debt accounting separately, that shows that you lack in proper maintenance of records.  There exists a possibility wherein you might end up scoring a low audit score in the audit report during an external audit process because the external auditor would understand the way your company’s bad debts have been maintained.

In short, you can see that maintaining a bad debt account is equally important as keeping the other business accounts. Slight negligence will turn out to be a massive problem from the business perspective. So, it is utmost essential to maintain the accounts professionally. To proceed ahead, most of the business owners choose to join hands with accounting experts, who are well-versed with the accounting procedures and can help you in a better way to maintain the books. JAXA Chartered Accountants, one of the DAFZA approved auditors is here to help you to manage your bad debt accounting. Since its inception, it has been helping millions of business owners to maintain their business accounts and does provide customized solutions based on the business need. To have a word with our experts, do contact us today-we’d be glad to assist.