Who is a Debtor to the Company?

Most companies do not sell their products for cash but on credit and purchasers are expected to pay for the goods they have bought within an agreed period of time - 30 days or 60 days.

The period of credit would vary from customer to customer and from the company to company and depends on the credit worthiness of the customer, market conditions and competition. Often customers may not pay within the agreed credit period. This may be due to laxity in credit administration or the inability of the customers to pay. Consequently, debts are classified as:

1. Those over six months, and
2. Others

These are further subdivided into:-
1. Debts considered good, and
2. Debts considered bad and doubtful

If debts are likely to be bad, they must be provided for or written off. If this is not done, assets will be overstated to the extent of the bad debt. A write off is made only when there is no hope of recovery. Otherwise, a provision is made. Provisions may be specific or they may be general. When amounts are provided on certain identified debts, the provision is termed specific whereas if a provision amounting to a certain percentage of all debts is made, the provision is termed general.

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