Applications Overview
Applications Overview
Applications Overview
Corresponding liability is an important practice in accounting. He is currently available in this asset class and use the correspondent accounts for a very important concept, provide an accurate picture of the company's financial situation.
Receivables represent the amount of customers. The main customers have purchased the product or service on credit, and has agreed to pay on time. Receivables are stated at net realizable value, which is the number the company expects its customers to meet their commitments. Given the realities of the business, companies know that a certain amount of their claims and can not recover bad debts. Do not they know that customers are able to pay them, but they know that some do not. Knowing that the principle of coordination of security companies to make their accounts more accurate picture of their situation.
The principle of congruence, the foundation of accrual accounting, states that the expenditure has been achieved through the creation of income deducted from that income for the same period. Apply for this expense, companies need to determine what percentage of their claims, they may not be able to return and remove it before even knowing the customers and the amounts will not be able to pay. This is to ensure that its economy is not flawed, as they would be if a company can claim the same.
To meet the needs that companies have a provision for bad debts and provision for doubtful debts in mind that bad debts be duly informed. This article is an estimated percentage of total credit losses. This item is considered an active disadvantage. This asset class is the opposite of normal activity, increased with a credit or fall with an input stream. Different companies have expenses for bad debts or uncollectible accounts expense in different ways. For example, a business simply by using the experience of the collection, while another may perform more sophisticated analysis. No matter how you calculate the deduction for bad debts account is to tell readers of financial statements as a proportion of total receivables are not collected.
Throughout the year, because some customers do not pay their way, the company to cancel the debt by taking the amount of bad loans to customers and increase its reserves for losses on loans from their balance sheets. reserves for losses on loans that the revaluation account, which reduced the carrying value of an asset and also recognize bad debts. Balance Scorecard would, or lending losses at the expense of reducing outstanding debts. This gives the net assets which are then reported as part of current assets in the Budget.
If companies have not followed the practice of the claims of the balance sheets and income would be misled about the company's liquidity and profitability, which could take the company to be less healthy than we think or be underestimated. An example may illustrate this point. Company A has $ 10 million in accounts receivable. After the concept of claims that they felt bad loans and bad debts created an account that shows up on $ 500,000 (based on amounts not collected from the previous year). Accounts receivable is $ 10 million less than its allowance for doubtful accounts of $ 500 000, giving them a debt of new accounts of $ 9.5 million. The company said bad loans correctly and has a clear idea of your financial situation. Company B, however, has the sales figures in the same, except it does not follow the concept of credit.
Therefore, they believe they have more than $ 500,000, they actually do. It would be a big problem for a company that believes they have more assets than they do.
The importance of matching the claims can be clearly illustrated in the banking sector by allowing bad debts is an essential part. Banks create a loan loss reserve to cover expected losses due to defects. This reserve is a cushion if some customers do not pay their loans. Without it, the bank could be taken without sufficient capital.
Banks and companies can also make mistakes in calculating the granting of credit losses, which may lead to an underestimation of the debt. This is very important for the recession began in 2008. Many banks are underwater and "toxic assets" because they do not correctly estimate the amount of default, when you are without sufficient capital. They can also be expected to overestimate the debt, which could lead banks to hold more money than the provisions for losses on loans and receivables, which affects the whole economy, because there is less credit.
While not a perfect measure (that nothing in the accounts s) matching funds provide a way to explain the known and unknown. The allegations are a feature of modern business. Companies may be necessary to receive goods and services, pay later. However, bad debts are also part of the company and allows companies represent a clearer picture of their capital.
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