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 Accouting assignment Task:Control the bad debts of the company

Prince Incorporated., a wholesaler of hardware where the sales staff makes sales without worrying about the credit worthiness of the customers. You have been engaged as a trainer to conduct ‘the management of debtors’ for the company’s inexperience accounting staff. Explains the materials you will prepare so as to conduct an effective training programme.

(a) Nature of trade debtors.     
Trade debtors are buyers who purchase from the company’s goods on credit.
        
(b) Nature, causes and the accounting treatment for bad debts.   
If a firm finds that it is impossible to collect a debt, then that debt should be immediately written off as a bad debt.  Bad debt is a debt which the debtor will not be able to pay.

Causes:  The debtor is suffering a loss in his/her business, or even has gone bankrupt and cannot pay off the debt.

The steps for recording bad debts are as follows:
Step 1: To write off the debt from the debtor’s account.
 Dr   Bad debts account
 Cr   Debtor’s account
Step 2: To close the bad debts account at the end of the year.
 Dr   Profit and loss account
 Cr   Bad debts account
        
(c) The various controls the firm can use to reduce the risk of bad debts.   
●   Make a reduction in the credit limit on high-risk customers.
The company can lower the credit limit of the customers, when payments are late or if the customers have too much other debt.

●   Correct the credit policy.
A company may have to correct or adjust credit and collection policy, if it is worrying about it has too many bad debts. By tweaking or adjusting certain things, try to makes it more difficult for customers to get approved when their economy is experiencing a recession.
●   Provide new arrangements.
If you offer unconventional repayment plans to the customers who are experiencing hardships, they may consider paying a past debt due. E.g. reducing the interest rate and only requiring the debtor to make a payment every other month until they get rid of the crisis.

●   Communicate clearly the outcome if an account becomes a bad debt.
Send a letter to explain clearly the possible outcome when an account becomes a bad debt if payment arrangements are made and the customer does not stick to them. Once the bad debts are forwarded to a collection agency, this information will be reported on the customer's credit file for seven years. When a court is petitioned and a judgment is received, the collection agency can proceed with a wage garnishment or bank garnishment. And the real estate property of the customer will possibly be detained.

●   Follow up earlier with customers.
The longer a debt goes without a payment the easier it becomes a bad debt. Mail a letter to remind the customer to make their payment as soon as he misses a payment
        
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