Bad Debt Reserve
Before going into the details of the bad debt reserve, it is important to first of all know in detail about the term bad debt. This is basically the amount which is owed to the individual or a business and this debt is usually got written off by the creditor.
Effect on the creditor
It is the amount which is faced by the creditor as loss. The term of bad debt is always sounding for a loss to the creditor that is why it is also classified in the category of expanse on part of the creditor. It is classified as an expanse because it just cannot be collected and one making al the reasonable efforts to make the collection of the bad debt or in other words the written off loan go wasted usually.
Using the bad debt option
Usually the bad debt reserve is considered as an option when the debtor who is liable to pay a specific amount of debt to the creditor but he or she is considered bankrupt. In some other cases the debt is considered as the bad debt reserve when the cost of pursuing of any further action regarding the retrieving of debt from the debtor. Then the debt is also considered as the bad debt reserve.
What to do when there is no profit
There are certain cases when there is no more profit left in collecting the debt. In these cases then, the collection of debt will cost for more than the debt itself. In these cases the debt is written of immediately and the credit is deducted as much as possible from the debtor’s account. In this way any balance present in the account is eliminated. Even then the creditor is represented as on loss. There is another category of the debts which is called as the doubtful debts.
Knowing the bad debt reserve
These are the debts about which there is a suspicion that they will become the bad debt reserves. Usually it so happens in case of the doubtful debts that business or an individual are unable to pay the debt and the creditors fear that these loans become the bad debts. Doubtful debts are those debts which a business or individual is unlikely to be able to collect.