Organisational Policy and Procedures on Bad Debts

Note: Company means Fresh Flowers Ltd

PURPOSE

The purpose of Company’s Bad Debt Policy is to describe the criteria and circumstances for the provision of or writing off of unrecoverable debts owed to Company.

SCOPE

This policy applies to all debts raised by Company whether it be in the form of fees & charges or services that have been provided by Company.

DEFINITIONS

• Bad Debt – The amount of a debt for which all reasonable steps to collect have been exhausted and the debt is not worth further pursuit. – could be important
• Debt – An amount of money owed, including an alleged debt.
• Debtor – A natural person (which includes a company or corporation) obligated or allegedly obligated to pay a debt.
• Provision for Doubtful Debt – An amount in the Financial Statements to cater for the possibility that some debtors will not meet their obligation to pay Company charges.

POLICY & PROCEDURES

Company fees & charges are levied after the provision of the service, consistent with industry

Practice. After the expiry of Company’s trading terms, there are numerous debt recovery steps Company can take to recover any outstanding monies that are owed from debtors. This can include, but is not limited to, reminder notices, negotiation of payment arrangements and referral of debt to a specialist debt collector. Recovery of Company’s debt will be in accordance with Company’s Debt Recovery and Financial Hardship Policy. It may become necessary to write off bad debts despite vigorously pursue collection.

Reasons to write off debts include:

• Bankruptcy of the customer or debtor
• Legal disputes over contract terms longer than 12 months
• Death or disappearance of a customer
• Termination of a business without payment of obligation
• Cost effective for Company to write off debts
• Financially unviable to pursue further action.

Company delegates authority to the Accounting Manager and their delegates to:

You will process entries without being approved by the Accounting Manager If the debt amount is <$2,000 in an individual case; and

You will process entries without being approved by the Accounting Manager if the debt amount is <$4,000 in a company or corporation case.

Identify and correct, or refer errors for resolution in accordance with organisational policy and procedures

Emma, the new bookkeeper has completed the following transaction regarding end of year adjustments (30/06/2020) and you are assigned to review and correct the work in accordance with Fresh Flowers’ organisational policy and procedures.

Transaction completed by Emma

Fresh Flowers supplied wedding flowers for Mr & Mrs White and invoiced $4,000 including GST on 05/05/2020. Unfortunately, they got divorced right after the honeymoon and it has been difficult to get in contact with either of them. There has been only one reminder sent out.

• Identify transaction errors above and refer decision making errors for resolution in accordance with appropriate company’s policy and procedures on Bad debts.
• Suggest correct procedures on Mr & Mrs White’s case.

Note :

Notes from the lecturer

What the policy/procedure says compared to the actions that Emma took.

Can also discuss her errors in the posting she did in the journal and suggest correct procedures on Mr and Mrs White’s case.  

My answer is in blue for Question 1, If you can add anything for Question 1 that would be great, so question 1 and question 2, I need to do an oral presentation on for 3 minutes.

So for the oral presentation I need to explain both question 1 and question 2, If you can look at question 1 and see if you can add anything else but question 2 needs to be completed.

You should be able to explain Part 3 issues and suggest correct procedures clearly using appropriate industry terminology within 3 minutes.

Type Answer here:

Emma’s Errors: The transaction date is wrong, it should have been 30/06/2020. Amount of bad debts is wrong. She has not included the GST amount as required (see calculation below). The respective account (Debtors) is wrong, it should have been Debtors Control Account. She had no authority to process the entries without the Accounting Manager’s approval since Mr & Mrs White are individual and debt amount was >$2,000.

Bad Debts = (4,000 x 100%)/110% =  $3,636.40

GST Collected = 10% x $3636.40   =       363.60

Debtors Control Account                     =  $4,000.00

Suggest correct procedures and journal here. 

General Journal