The balance percentage method is a method of making provision for bad debts, by calculating a certain percentage of the balance of accounts receivable to anticipate possible bad debt losses. This article will introduce the steps of making provision for bad debts under the balance percentage method in detail.
1. Determine the proportion of bad debts
Before using the balance percentage method to make provision for bad debts, enterprises need to determine the proportion of bad debts to be accrued. The proportion of bad debt provision refers to a certain proportion of the balance of accounts receivable, which is usually determined according to factors such as the historical experience of the enterprise, the characteristics of the industry and the credit status of customers. Enterprises can refer to the following steps to determine the proportion of bad debts:
1.Analyze the historical bad debt loss data of the enterprise to understand the occurrence law of bad debt loss.
2.Consider the characteristics of the enterprise and analyze the risk of bad debts in the industry.
3.Assess the customer's credit profile and understand the customer's ability and willingness to repay.
4.Based on the above factors, determine a reasonable proportion of bad debts. For example, the accrual ratio can be set as % of the balance of accounts receivable, etc.
2. Calculate the balance of accounts receivable
Before making provision for bad debts, businesses need to calculate the balance of accounts receivable. The balance of accounts receivable refers to the payment or expenses that have not yet been received by an enterprise for the sale of goods or services. When calculating accounts receivable balances, businesses can refer to the following steps:
1.Organize the sales records of the business and understand the specific situation of the goods sold or provided by the business.
2.Based on the sales records, the payment or expenses that have not yet been received are calculated to arrive at the accounts receivable balance.
3.When calculating the balance of accounts receivable, it should be noted that accounts receivable that have been recognized as bad debt losses and accounts receivable that have been discounted should be deducted.
3. Provision for bad debts
After determining the proportion of bad debts accrued and calculating the balance of accounts receivable, enterprises can follow the steps below to make provision for bad debts:
1.Calculate the amount of bad debt provision accrued according to the proportion of bad debts accrued and the balance of accounts receivable.
2.In the accounting books of the enterprise, set up the "Bad Debt Provision" account to record the amount of bad debt provision that should be accrued.
3.In the accounting statement, the provision for bad debts is reflected in the income statement as a period expense. At the same time, in the balance sheet, the provision for bad debts is taken as a deduction for accounts receivable to reduce the net accounts receivable.
The provision for bad debts by the balance percentage method needs to go through the steps of determining the proportion of bad debts, calculating the balance of accounts receivable and making provision for bad debts. We hope that this article can help you better understand the operation steps of making bad debt provisions based on the balance percentage method, so that you can reasonably predict bad debt losses and improve your risk management capabilities.