What is the contribution to the wrong debt?

Also known as a contribution to dubious accounts, the contribution to the wrong debt is an accounting provision that allows the company to absorb a certain amount of income that remains unsubscribed from the invoices sent to customers or from previous proper loans issued by the company. The idea of ​​this type of contribution is to create a small pillow that helps minimize the influence of the undeebited debt on the financial welfare of society. Small and large businesses make this post within the ongoing accounting process.

In many cases, the company will determine the amount of the contribution to the wrong debt based on the average amount of receivables that is transmitted every month. For example, if the company usually has average receivables each month of $ 500,000 in US dollars (USD), this contribution may be set at approximately $ 5%or $ 25,000. Other factors, such as the average aging of customer invoices, can also be taken into account. If a few large customers usually apply invoices between sixty and ninety days, rather than in the classForty to forty daily ranges, this may affect the percentage used to calculate the contribution.

Regardless of the amount of contribution to the wrong debt, this number is still considered part of the receivables and is counted in this part of the accounting records. However, business will always try to maintain the same amount on the operating account. If the worst scenario takes place and the total amount of the contribution is not collected in a given month, the company's ability to worship its own debt obligations remains relatively intact. This means that a bad debt allowance provides a similar function to a emergency or emergency fund that is set aside from the household budget.

operation with a contribution to a bad debt is particularly important for small companies. Since it is not unusual that businesses of this type work on lace -up budget, they cannot create some kind of pillow in the accounting process ifseveral invoices for customers would remain undeveloped and eventually be written off as impregnable. By placing a business so that it can pay operating costs in time, even if a certain part of the receivables is considered to be impregnable, the company protects its credit rating and relations with different sellers and suppliers.

Periodic evaluation of the current contribution to poor debt is necessary. This can be done by analyzing data, such as the average monthly amount of receivables, received the rate of loan payments and how quickly customers postpone payments for outstanding invoices. When these factors change, the number of posts may also change depending on the range of the shift.