Question

Can someone please explain to me why a decrease in bad debt expense is a concern or if an increase in debt expense is a concern as well.

For example if in the previous year the company had 162,344 but now the current year it has 148,252.

What is the inherent risk here with this?

Answer 1

Bad Debt Expenses: In order to understand the concern related to bad debt one has to clearify the bad debt and its impact on its business and financial statements.

Bad Debts: They are those debtors / accounts receivable to whom sale has been made but receipt of payment against those sale is not possible. It means It is sale and administrative expense and noted on income statement. Recognizing bad debt expenses lead to offsetting / reduction to Accounts receivable on the balance sheet, although not reduce the right of collection in future if possible.

Increase as a Concern: Increase as a concern: Sale is increasing , Accounts receivable is also increase and bad debt is also increasing, it means profit is not increasing as increase in bad debt will set off from the income statement.

Impact : - Direct Loss

- Reduce the Revenue Part

- Cash Flow Statments

Decrease as a Concern: Sale is increasing . Accounts receivable is also increasing and bad debt is decreasing , it means organisation can look for more credit period from their supplier ad use the money recived from sale for expansion and other activity of the organisation and also keep enough balance to pay their creditors on time.

Inherent Risk with the Bad Debt: Credit Given to customer , As one has to understand the worthiness of the customer before giving credit period, Because Bad debt is the unfortunate cost of doing business and risk of extending credit will always be there, but business need to keep that risk at minimum acceptable range in order to survive. Increase and decrease will determine the extended credit will be given further or not.