how to calculate bad debts

[sheenamsharm]

how to calculate bad debts by making separate accounts

[geethaa]

There are two ways used in accounting for the bad debt. The first one is the Non-GAAP or the direct write off method and the second one is the GAAP or the allowance method.

Here are some of the ways on how you can compute bad debt:

1. Direct write off method. For the direct write off method, the uncollectible amounts are deducted from the revenue of the sales. It is charged directly to the income statement. This method is not for financial reports. This is because of the disadvantages that come with using the direct write off method, like unmatched balance with the sales revenue and the supposed accounts receivables are overemphasized.

2. Accounting method. For the accounting method, a percentage of the revenue from all the sales is set aside to cover the bad debts in an accounting period. The lack of money or the excess from the estimation is then fixed on the following accounting period. Media URL: http://numia.biz
Description: Numia Online Accounting Service