EFFICIENCY OF ACCOUNTING RECORDING FOR DOUBTFUL AND BAD DEBTS
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EFFICIENCY OF ACCOUNTING RECORDING FOR DOUBTFUL AND BAD DEBTS
1. INTRODUCTION
A firm, bank, or financial institution may be unable to recover outstanding balances for certain receivables on the due date. Both the debtor and the debt become dubious. If receivables cannot be recovered, we refer to them as Irrecoverable Debts or Bad Debts.
This could arise for a number of reasons such as improper follow-up for recovery by the banks where the borrower has expired, customer going bankrupt, trade dispute or fraud, Parties are not willing to pay, weak financing position of the borrower
acceptance of weak securities like joint property, illegal property, defective documentation, suspension of transactions in running finance accounts for three months or more, default in payment of three consecutive installments.
Banks provide credit to people for a variety of reasons. Individuals can use credit to make major purchases. As a result, rather than paying thousands or millions of dollars now, businesses can take advantage of financing options that allow them to pay for the things over several months, if not years.
If banks would not give such credits, they would be unable to produce many sales or make more money through credit creation, as long and short-term credits provide an extra source of revenue for any bank in the form of interest levied on accounts.
Most developing-country banks and financial institutions struggle to extend loans since most borrowers fail to pay the amortisation and interest. If adequate accounting and management assessment of the borrower’s credit risk is kept precise and in accordance with standards, there will be no problems because the loss from such uncollectibles will be charged to the profit and loss account before the fiscal profit at the end of each trading period.
UNICS Bank Cameroon declared bankruptcy in 2009 after losing the majority of its capital to borrowers. Perhaps the financial records, verification prior to debt granting, and her efficiency and follow-up were not optimal.
To live, let alone grow, any bank or firm must be interested in credit score outcomes, which necessitates the keeping of accurate and efficient records.
To function properly, when a business realises that it is unlikely to recover its debt from a receivable, it must ‘write off’ the bad debt from its records. This guarantees or ensures that the entity’s assets (i.e. receivables) are not stated higher than the amount it may reasonably anticipate to recover, which is consistent with the principle of prudence in accounting.
Due to the researcher’s absence from the nation, this paper is limited to further information from UNICS. In addition, one manager from each bank provided feedback on the debt recording policy.
Because identifying all players involved in creating a good accounting record in both institutions proved impractical. Again, the survey’s length and scope were constrained. As a result, the survey instrument makes a trade-off between the amount of information required and the response rate.
It is crucial to determine whether UNICS failed in 2009 due to weak accounting, managerial control, and recording. As a result, it is vital to assess the effectiveness of this bank’s accounting records. This will entail validating the way bad debt allowance is computed and reported before making a recommendation.
1.1 Research Motivation
Consumer bankruptcies are expected to rise at an alarming rate due to the terrible state of the economy in both developing and developed countries.
According to Malhotra and Malhotra (2003), customers and consumer credit increased from $10 billion in 1946 to nearly $2 trillion in 2003. According to the Federal Reserve Bank of America’s most recent figures, it is currently worth about $2.5 trillion.
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