Question

How important are current economic conditions to the process of making an estimate of the allowance for doubtful accounts? Explain.

Answer 1

Answer is as under :

Every year allowance for doubtful debt account is required to be created . The same is created on the basis of favourable and unfavourable market economic conditions, management future predication, debtors payment receipt cases, management policy etc. It should be done with atmost care else same will show unfavourable profitable position of the company

The estimates are based on past experience of the debtors and future activities of the company and future market. When the general economic condition are found to be favourable in nature, doubtful debt amount tends to be less then the reverse situation

In following manners the current economic condition impact the process of making an estimate of the allowances for doubtful account :

a. Exchanged rate : Estimate for doubtful allowance get much affected by changes in foreign exchange rates and inflation rates

b. When economic is growing interest rates will get cheaper, so the debtors borrowing power will get stronger and repayment of outstanding fund is made easier for him. Many time government waive off the loan for many sectors which will lead to reduction of debt .

c. Favourable government policies and rules and regulation implemented in the favour of debtors will lead him to make early payment

d. Government announcement of new relation for specific sectors, allocation of budget to sectors like infrastructure, housing projects, education, defence, medical etc. will lead to favourable market condition in the country. There are macro and micro economic variable factors towards it.

All above are indication of favourable market conditions. Here company should make provision for doubtful debt in lesser amount as chances of recovery are more.