What is bad debt
Especially when you are in business, charged off as bad debt is an accounting term that roughly means that if say a company finds that those people to whom it has given some money but they later on find that the person is unable to pay it off, then the company charges it off as bad debt and shows that amount as a loss.
For an example, you could be a wholesaler and you giving out credit terms to your customers with 3 months terms. Then you found out that their business is not doing so well and they are unable to pay the amount of stocks they have taken.
An important point to be noted here is the fact that charging off as bad debt does not signify by any means that the person does not need to pay the debt any more. It is obviously his duty to clear off the amount he has borrowed.
Legal actions
If he fails to do so, you, as the company or the individual whoever is the creditor will take some kind of action against the person for legal and justified reasons. However, for the meantime to balance his sheet and to show the loss of fund, he needs to charge it off as bad debt.
If by any means the bad debt is recovered, the entry is negated by making a corresponding entry in the other side of the balance sheet. For small firms that involve little stock inventory, they play the game with little budget.
How to avoid bad debt
It is absolutely essential for you to be very sure and certain before lending any money as when people are working with limited capital and investment and a lot depends on every single trading, a bad debt could turn a lot of tables. An entire firm can fail because of bad debt especially for small firms as they find it hard to manage even minor loss.
If a new clients with no credit record comes to you, always transact in cash term. Give them a few months and see how they fare. See if you have issues cashing in their checks and on how many occasions.
This can be a problem to small retailers. I know the feeling, when i first got started selling online then, nobody take e-store seriously. I have to carry stocks in cash term. It is one of the worst thing i’ve ever felt in my life.
But it is the only way these wholesalers can protect themselves. Afterall, i’ve no credit record with them.
A lot of firms have suffered in the past owing to bad debts. Make a conscious and justified decision before investing and lending money to others as ending up charging someone off as a bad debt could be a major setback.
Bad debts are no fun
Bad debts are a form of loss. Any loss is hard to deal with. Although, companies make their best efforts to recover all their money, yet sometimes when there is no option then they have to write an account off as bad debt.
No matter big or small; every firms find it difficult to accept losses as they deter the progress of your business. However, big firms have sufficient funds and stand in a position to recover from such losses.
On the contrary small firms that rely a lot on their stocks and inventory suffer badly because of such bad debts. They look for desperate measures to claim their money back as it is vital for the firm’s success. Inventory refers to raw materials or goods used and any bad debt incurred in this will have cumulative repercussions.
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