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What controls can be implemented to limit bad debt expense?

Bad debt expense is incurred by a company when a customer who purchased on credit doesn’t actually pay the cash to a company. The company can implement certain controls to reduce this risk.

Two controls that can be implemented include credit checks on new customers and requiring new customers to use credit cards.

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  • What is the formula for calculating the ending balance for allowance for bad debt?

    The allowance for bad debt reserve is a contra-asset that is recorded in the asset section of the balance sheet. The company must roll forward the reserve each year to make sure the reserve is adequate. To increase the reserve, the company would record additional bad debt expense. When the company writes-off a receivable, it decreases the allowance reserve.

  • What are the methods used to estimated bad debt under the allowance method?

    The allowance method is the option that is allowed under U.S. GAAP. U.S GAAP leaves it up to the company to determine how they want to implement the allowance method. There are three common options include the percentage-of-sales method, the percentage-of-AR method, and the aging of AR method:

  • What procedures can a company implement to reduce bad debt expense?

    Bad debt expense is incurred when a company can collect cash or payment from customers who purchased on credit. There are two ways that a company can reduce this risk. First off, they can perform credit checks on all new customers. Secondly, the company can require new customers to use credit cards. Once the company has experience with the customer, they can determine whether to allow them to purchase on credit and what is the max credit that is allowed.