Measures to Reduce the Bad Debts - Essay Example

Assets equal to Capital and liabilities

            Assets are always equal to capital and liabilities because when a person or an entity starts their business, they inject the capital which can be in form of cash or other assets therefore at the beginning of the entity all there is are assets and capital. When the company expands it purchases goods or offers services which give rise to further assets and further liabilities as loans are acquired and credit is obtained out of that same capital.

            Some amount is also generated as profit for their business. Therefore, all the transactions of the entity take place through the same capital and the assets of the company must always equal their liabilities and capital.

Date of financial position begins with ‘as at’ and

Income statement begins with ‘year ended’

            The statement of financial position gives the position of the company at a given moment of time where it provides the description of the company’s assets, liabilities, and equity from its establishment to that particular date, while the Income statement provides the details of all the income and expenditure activities during the year as at the date of balance sheet.

            In a nutshell, the financial position is the standing at that date while the Income statement is the movement during the period which is why the dates begin with ‘as at’ and ‘year ended’ respectively.

Net cash flow different from net profit

            The figure of the net cash flow will mostly be different from that of net profit because the cash flows of the company are purely due to the monetary items such as sale, purchase, the monetary income of dividend and interest, monetary expenses of salaries, and rent, etc.

These expenses are pure of monetary nature while the net profits of the company not only involve these monetary items but also involve noncash items such as depreciation, fair value, amortization, etc therefore normally cash and cash equivalents of the company are usually not equal to their net profit.

Expenses that are not affected by the cash flows

      Certain expenses are not affected by the cash flows of the company as it does not involve cash dealing at the time of the transaction. These expenses or income do not affect the cash flows because of their nonmonetary nature and as they are booked on an accrual basis hence they do not generate or cost any cash.

These expenses can be depreciation and amortization of the fixed and intangible assets, the gain or loss on sale of fixed assets or intangible assets, the effect of the market value on the investments of the entity, and revaluation of the fixed assets which causes a decrease in the price and thus additional depreciation, etc.

Similarities b/w dividends and drawings

            There are some similarities between the dividends and the drawings of a company and sole proprietor respectively.

• Dividends and drawings are both made of equity and cause a reduction in the total equity of the entity
• Both are regarded as the reward of the investors

Differences b/w dividends and drawings

            There are some distinctions between dividends and drawings which are stated below:

• Dividends can only be paid out of the profits of the company while the drawing of a sole proprietor can be out of the capital
• Dividends bear tax and have to be paid on the amount of dividend declared by the company while the drawings usually do not require tax to be paid on it
• The dividends are treated as an expense of the company while drawing is not an expense.

Difference between bad debts and allowance of doubtful debts

            The bad debt expense of the company is that expense which in the best estimates of the company will not be received during the year and is charged to the profit and loss while an allowance for doubtful debts is the sum estimated by the company which, in the best estimate of the company, will not be discharged by the debtors of the company.

Measures to reduce the bad debts

            A company may use several ways of reduction of their bad debts which can cause the timely receipt of their sales proceeds and make the entity even more profitable. Some are discussed below:

• The company may obtain reliable information regarding the credit history of the customer, his paying capacity, and future cash flows.
• The company may also issue discounts to its customers so that they pay off their amount overdue on a timely basis to avail the discounts.
• The company can carry out a comprehensive customer study before allowing him any credit
• As a final consequence, the company can take aggressive steps such as moral persuasions and legal threats of reminders to obtain the credited amounts.