Question

Different collection methods Please answer both questions.

Referring to your make believe business that were used to answer the previous the Sarbanes-Oxley Act emphasizes how important Internal Controls are and the penalties that can be imposed on a company for not following good internal control practices. Please answer the following questions regarding Internal Controls. discussions, which collection method would you adopt for your business and why?

How do you determine what amount of receivable would be uncollectible? How often would that amount be adjusted? Who should make that decision?

Answer 1

The amount of receivables that are uncollectible can be determined in the following ways:

1. Carrying out a debtors ageing analysis
2. Estimating amount of sales made on credit
3. Past experience
4. Anticipated credit policy
5. Invoice payment terms that are more favourable for customers and less favourable for business

The frequency of adjustment of bad debt expenses is not fixed. It rather varies from business to business. The adjustments can be done monthly, quarterly or any such regular frequency, apart from writing off bad debts as and when they take place.

The management takes the decision of bad debts, the credit policy, the write off and other such technical grounds that help to analyse the traits rekated to bad debts.