Provision for doubtful debts and the decline in the value of clients

Provision for doubtful debts or depreciation of customers, which will be included in most financial statements
There is a principle in accounting principles called prudence and caution, which means that the company must take into account potential future losses as a result of the possibility of not fully collecting its debts from its customers, of course, it will be large
So that the method of decrease in the value of customers is also in line with the idea of the principle of the corresponding between direct revenues and expenditures and the value of the decrease expense that is recognized during the financial period or year, it is recognized in the income statement as an expense and the record is as follows
H / decrease expense of customers
        To
H / Decrease in the value of customers
The customer balance that appears in the balance sheet will be the total customer balance minus the balance of customer decline
There are two methods for calculating the decline in customer value
The first method is the income list method
The second method is the budget method

The first method is used in very small companies and it is an unprofessional method  

It is not recognized in international standards by showing the company's future sales during the year and is multiplied by the percentage of doubtful debts and the ratios estimated by the company’s management based on its experience.
An example of the income statement method
Assuming that the total balance of customers at the end of the year in the balance of the audit is 100000, and the company has a balance of depreciation of customers' value at the beginning of the year 1000 and the forward sales amounted to 250,000 and the debt ratio to the company estimated that it will not be collected during this year as well 1%
The value of decline in customer value during this period = 250000 * 1% = 2500
The limitation is
2500 H /  decrease  expense for customers (income statement
  Decrease in customer value 2500 h/
It is assumed that the total balance of the decline in the value of customers is 3500
Thus, the balance of the clients appears in the balance sheet at a value
100000- 3500 = 96500
This method, as we are telling us, is weak and is only used in very small companies
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The second method is the budget method 

It is assumed that any company has a customer accounts system that it divides customers into credit periods and let it be 30, 45, 60 or 90 completely, which is called the age of receivables to is AGING RECEIVABLE
The accounts management evaluates the debts to the probability of not collecting them in each of the credit periods, for example, the total debt of customers who have a credit period of 30 days and let it be 5 million and the company decided, for example, that in 2% of this debt is likely to be uncollected
So the value of the decrease in the value of customers = 5 million * 2% = 100000
Thus, in each credit period, the company estimates the potential percentage in non-collection of debts and multiplied it by the existing debt completely
Practical example
The international company had a balance of the decrease in the value of its customers 1000 since last year, and the company calculated the decrease in this year and its capacity is 4000
Assuming that the indebtedness of customers to less than 30 days 70000
Customer indebtedness from to less than 60 days 18000
Customer indebtedness to less than 90 days 10,000
Customers' indebtedness to more than 90 days in 2000
The total debt is 100,000 pounds
The percentage of estimated un-collectable debts the percentages differ from one company to another according to the quality and quality of clients or not, and the companies ’estimates differ according to the nature of the industry and other factors
Less than 30 days 2% = 70,000 * 2% = 1400
Less than 60 days 5% = 18,000 * 5% = 900
Less than 90 days 13% = 10,000 * 13% = 1300
Greater than 90 days, 20% = 2000 * 20% = 400
 Total decrease balance in customer value = 1400 +900 +1300 value +400 = 4000

And there was a balance of the decrease in the value of customers in the first period of 1000 pounds, so the difference is 3000
  The restriction is as follows
3000 H / decrease expense for customers
 H / decrease in customer value
The expense, of course, goes to the income statement
The customer balance appears in the balance sheet at 97,000
100000- 4000  = 96000
Suppose that the balance of decline in the value of customers at the beginning of the period was 5,000 not 1000
This means that I have a balance of the decrease in the value of customers 5000 greater than the required amount in this year 4000
The difference of 1000 entries is as follows
h / depreciation of customers 1000
1000 H / recovering the decline in the value of customers as income in the income
Statement
The customer balance will be shown in the balance sheet at a value
100000 -4000   = 96000
This method is used in international accounting standards
Rebated than the balance of the decline in the value of customers'
Accounting treatment for bad debts
We concluded the issue of the decline in the value of customers to the provision for doubtful debts, and the rest of the part, which is related to bad debts
When the company makes sure that it is not able to collect the debt from the customer because of the client’s bankruptcy, death, or any other reason. Only the accounting treatment is discussed here.

Processing according to international standards 

By deducting the bad debts from the balance of the decline in the value of customers and the record is made
X / Decline in customer value
H / the client
In the event that the debt is collected after that from the customer, if possible
 Constraint will be
H / cash
H / Decrease in the value of customers 

Customer accountant and other credit balances 

It is known that the clients' accounts are originally in debt (meaning that the customer owes the company), but some customers may pay advance payments
  Consequently, its balance will be a credit, and it will appear in the trial balance as a credit. When preparing the budget or the end of the financial period, we must close this balance in the account of advance payments clients and it will appear among the other credit balances in the current liabilities item
It will be from
H / the client
*****************
To
H / prepaid customers
At the beginning of the financial period, it reverts to reflect this restriction if the customer would take his bill and deal normally
Clients who are credited with credit, you must know the reason: was it an advance payment from them, a refund, or a mistake in the registration on the part of the General Accounts Department
As for the account of advance payments clients, the analysis factor of them remains on the Excel sheet, meaning you have 75,000 thousand balance in this account, which must be analyzed for each client separately.