A bad debt provision is a reserve that you build up over time against the future recognition of specific accounts receivable as being uncollectible. Thus, if a company has issued invoices for a total of $1 million to its customers in a given month, and has a historical experience of 5% bad debts on its billings, it would be justified in creating a bad debt provision for $50,000 (which is 5% of $1 million).
It is impossible to know the exact amount of bad debts that will occur at some point in the future from the current account receivable, so it is entirely normal to continually readjust the bad debt provision, as you gain a greater understanding of how collectible the accounts receivable really are. These adjustments may lead to future increases or decreases in the bad debt expense. Since these adjustments can be viewed as a means of manipulating a company's reported profits, you should fully document your reasons for making the adjustments.
You would create a bad debt provision with a debit to the bad debt expense account, and a credit to the bad debt provision account. The bad debt provision account is an accounts receivable contra account, which means that it contains a balance that is the reverse of the normal debit balance found in the associated accounts receivable account. Later, when a specific invoice is found to be uncollectible, you create a credit memo in the accounting software for the amount of the invoice that is uncollectible. The credit memo reduces the bad debt provision account with a debit, and reduces the accounts receivable account with a credit. Thus, the initial creation of the bad debt provision creates an expense, while the later reduction of the bad debt provision against the accounts receivable balance is merely a reduction in offsetting accounts on the balance sheet, with no further impact on the income statement.
The reason for a bad debt provision is that, under the matching principle, you should match revenues with related expenses in the same accounting period. Doing so shows the full effect of a billed sale transaction in a single accounting period. If you were to not use a bad debt provision, and instead used the direct write off method to only charge bad debts to expense when you were certain that a specific invoice was not collectible, then the charge to expense might be many months later than the initial revenue recognition associated with the billing. Thus, under the direct write off method, profits will be too high in the period of the billing to the customer, and too low in the later period when you finally charge some portion or all of an invoice to the bad debt expense.
ERS is a business process between trading partners that conduct commerce without invoices. In an ERS transaction the supplier ships goods based upon an Advance Shipping Notice (ASN) and the purchaser upon receipt confirms the existence of a corresponding purchase order or contract verifies the identity and quantity of the goods and then pays the supplier.
Assets are things which is provide service for long duration it may 3 years 4 years or for long period of time.These items capitalize in our account books and charge depreciation in every year according to these rate it may 20 10 100