>> November 4, 2009
Teaching of accounting is not easy, every student is challenge for accounting teacher and many concepts are very difficult to make understand to students. One of those is to teach concept of debtor, bad debt and
provision for doubtful debt.
First of all to introduce students about debtor
Who is debtor?
Debtors are customer of any business organization. They purchase goods from businessman. But all customers are not debtor because if customer gets goods after prompt payment, then he will not become debtor.
So, Relation between businessman and debtor
Businessman has to take the money of goods sold. So, it is his duty to record what amount he has to take from debtor because different debtors take different goods in different quantity at different dates. Every time when a debtor purchases goods from businessman, record of each credit sale will be done by accountant.
After this, your student will realize that why debtors are are so important in business and in accounting. They will understand that businessman will sell more on credit, then more debtors will become and more entries of these transaction will be done in business books .
Every debtor is not honest and it may possible that some of amount may loss due to not paying by debtor of business. Ram has taken goods from X company of $ 50000 but he does not pay $ 10000 and all other amount he paid, so this amount will become Bad Debt and it is the loss of business. Total value of debtor will decrease with the amount of bad debts.
Because we pass the entry bad debts account debit and debtor account credit , so there is no need to deduct extra but if businessman realize in the end after closing the accounts of his books , then we have to deduct this amount in balance sheet .
Provision for Doubtful Debt
Many accounting teachers have failed to clear the concept of provision for doubtful debt. If accounting teacher will use my technique, then they will easily teach better.
Sham is a businessman. He is very sad because he has invested $ 100 in his business and he purchased goods $ 60 and sells it to his debtor at $ 100. But he receives only $ 10. Now this amount is less than the cost of good purchase, his tension is how will he purchase same $60 goods, he has only $ 10. One of his friend suggest him sell other assets and purchase the goods . He sells his other asset $ 40 at $ 30 on credit and gets loss of $ 10 and gets only $ 20 dollar and he again purchases goods of $ 30 and sells but he got nothing . What will happen , business will close . He has no money . Now one intelligent friend suggest to businessman to reserve his cash . It must be some receivable amount as doubtful debts . What is benefit of it . If some debtor will not pay , you will purchase goods from your working capital and there is no need to sell fixed asset . So , this amount will be called provision for doubt full debts .
Suppose in above example Sham reserves 10 to 20% of his debtor as estimated loss , then he can use this amount for purchasing raw material . After this there is no need to sell the $ 40 other asset.
After this teacher's duty is to explain the benefits of provision for doubtful debt
• Provision for doubtful debt is helpful to purchase goods in case bad debts will happen in reality.
• Provision for doubtful debt is helpful to effective use of working capital.
• Provision for doubtful debt is helpful to secure the business.
Now, explain how to treat , it . Learn here .
You might like: