Factors when setting the provision for doubtful debts
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Factors when setting the provision for doubtful debts
The first factor to consider is the economic cycle. For example, if there is a recession or high inflation and interest, the provision for doubtful for debts may be higher than a provision during a growth period and where inflation and interest is low. The second factor is experience. The business may want to consider the historical trends of credit sales which ultimately become bad debts. They may also look at the industry average as a way to set the provision for their doubtful debts. The third factor is customers. When the business is setting the provision for doubtful debts they may set a higher provision if there is a lower disposable income of customers and also higher debt levels of customers.
