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One subject that proves to be troublesome for credit managers is determining the criteria in calculating reserves for bad debts. The issue has become particularly troublesome for publicly traded companies who are subjected to close scrutiny resulting from the dictates of the recently enacted Sarbanes Oxley legislation. Federal law now mandates that reporting of assets must be done in a manner that provides a true and accurate assessment of their values. For many businesses accounts receivable represents the single largest liquid asset on the balance sheet, if not the single largest asset period. The assignment of reserves for bad debt against accounts receivable has a direct impact upon the value of this key asset. As a result auditors are paying particular attention to the methodology that goes in to arriving at these values.
This paper addresses the issues of bad debt reserves and the process of bad debt write-offs.
In an effort to portray a true value of the receivables, careful consideration must be given to the establishment of the bad debt reserve or allowance. In today’s world with the advent of Sarbanes Oxley a major refocus is being given to how these reserves are being established. This is creating a real challenge to the credit professional who has to arrive at a logical number.
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