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Bad Debts Accounting: How Bad Debts Can Affect Your Business

Some business owners may see bad debts as normal things that happen as you go about doing your business. It is sometimes viewed as one of the risks of running a company. However, even if this is the case, it should not be tolerated as this can be the start of a crumbling business. Take help from accounting firms in Dubai.

It should be remembered that the longer the debt has not been paid, the more difficult it is to procure. Some companies that have debts from other companies get away with it and the latter simply deal with the loss. This should not be the case for both parties because both practices can be harmful to them.

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What is Bad Debt?

To understand more where this article is going, bad debt should be defined first.

Bad debt then is an amount considered as a loss of a business instead of again because the payment cannot be obtained after all efforts have been made. Most of the time, the debtor cannot pay off the said debt because it has declared bankruptcy. It also happens when the creditor has done a lot of work in collecting the debt that the cost of doing it has overpassed the amount that is supposed to be collected.

 What Causes a Bad Debt?

There can be a lot of reasons that a bad debt happens. It can be due to the economic recession, a poorly run company, or even a lack of effort to collect the debt.

Bad debt can come from loans to clients or vendors, credit sales to customers, etc. Although invoice is given to the clients who have ordered goods and services that they have received, the bad debt still happens because those people decide to not pay or cannot pay at all because of reasons that their companies must be facing as a business.

How Harmful are Bad Debts?

Bad debts are considered to be harmful to any business. It should not be considered as a normal thing that happens in the industry because it can ruin businesses. A large number of bad debts will not do any company any good and actions should be taken to control the damage that has been done by bad debts.

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The Effects of Bad Debt on a Company

1. Loses Money

Without any doubt, bad debts cost a company money. The expected amount of money that should have been added to the sales and revenue is now considered to be a loss. It affects the forecasts as well as the probable growth of a business, especially if it is a big amount.

2. Makes Accounting Complicated

Bad debts mess up the accounting process that accountants work hard on doing. As if accounting itself is not difficult enough, bad debts will make it more complicated. Doing accounting processes basically, means recognizing when the sale is made. The amount of money that is expected to be received is usually accrued by then. Your accounting department will then need to deal with adjustments as a continuous delay of payments happens until that amount needs to be written off as a loss.

3. Ruins your Reputation

Bad debts may just be one of the reasons that can ruin a company’s reputation. It can impact financial books in some cases. Some may even view your firm as a company that is not good at handling collections.

4. Suffer a Loss of Good Employees

Your employees can start feeling low morale in the office when bad debts start kicking in. This means that bonuses, increments, benefits, and others are not offered and given anymore because the bad debts have gotten into the company's financial status.

This means that you are on the brink of losing talented and trustworthy employees who may have been working for you for several years now. This can affect you greatly.

When signs that a receivable is turning into a bad debt show up, you should take action right away by handing it over to an agency. There are debt recovery firms that specialize in bad debt collection so you wouldn’t need to worry too much about it.

Accounting Firms in Dubai

Farahat & Co., for more than 30 years, has been continuously helping businesses with what they need and offering solutions that can greatly help them. As one of the leading accounting firms in Dubai, we can surely aid you with your accounting problems.

Our accountants are experts in what they do, and we have dealt with many dilemmas in the business industry that we know just how to help you. We can provide the information that you need as well.

You can contact us now and book a consultation for you to know just how much we work hard for the success of your business.

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.