EVALUATING THE EFFICIENCY OF ACCOUNTING RECORDING FOR DOUBTFUL AND BAD DEBTS

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EVALUATING THE EFFICIENCY OF ACCOUNTING RECORDING FOR DOUBTFUL AND BAD DEBTS

ABSTRACT

The purpose of this research is to make an evaluation on the efficiency of accounting for doubtful and bad debts for Unity Co-operative Society Plc. (UNICS), a micro financial institution in Cameroon. A purposive sampling technique was used to select two banks for the study. A face-to-face interview was conducted with the manager of Nordea Bank. The manager of UNICS made available the financial statements for 2006 to 2009, he also answered some questions over the telephone.VResearch findings showed that UNICS had failed in the period 2006 to 2009 to record properly the bad debt expenses. Also, the bad debt expense policy did not appropriately match revenue to expenses incurred, as such, revenue was not properly recognized in accordance to Generally Accepted Account Principle. (GAAP). In 2007, the Annual Report reflected liquidity assertion that was contradictory to the cash flow difficulty shown in the Cash Flow Statement. In conclusion, UNICS needs to take a more conservative approach in matching and recognizing revenue and expenses incurred, and practice proper accounting reporting in accordance with the GAAP. Also, UNICS need to minimize the bad debt expense and solve the cash flow problem by selling most of the account receivables without recourse Nordea Bank uses ratios calculation to enhance the quality of financial statements, hence, has been able to solve debt related problems. These ratios calculated provide information about how Nordea assesses different aspects of her performance and how effectively or ineffectively it is performing.

INTRODUCTION

A company or bank or financial institution may not be able to recover its balances outstanding in respect of certain receivables on the due date. The debtor becomes doubtful, as well as the debt. If the receivables finally cannot be recovered, we refer to such receivables as Irrecoverable Debts or Bad Debts. This could arise for a number of reasons such as improper follow up for recovery by the banks where borrower has expired, customer going bankrupt, trade dispute or fraud, Parties are not willing to pay, weak financing position of the borrower, acceptance of weak securities like joint property, illegal property, defective documentation, suspension of transaction in running finance accounts for three months and more, default in payment of three consecutive installments, just to name a few.

Banks issue credit to consumers for numerous reasons. Credit allows individuals to purchase large monetary items on a credit basis. Thus, instead of having to pay several thousands or millions now, they can take advantage of financing arrangements that allow them several months and even years to pay for the items. If banks did not offer such credits they would not be able to generate many sales or make more money by credit creation as this long and short-term credits provides an additional source of revenue for any bank in the form of interest charged on account.

In most banks and financial institutions in the developing countries, granting credit remains a puzzle as most borrowers may default the amortization and interest. If proper accounting and management assessment of the borrower’s credit risk is kept accurate and according to standard, there will be no worries as the loss from such uncollectible will be charges to profit and loss account before the fiscal profit at the end of the trading period.

UNICS Bank Cameroon had suffered bankruptcy in the year 2009 as a greater part of its capital was out to debtors. Perhaps its accounting recording, verification before debt granting as well as her efficiency and follow up was notthe best. For any bank or company to survive, let alone prosper, there must be an interest in credit scoring results, hence the must keep efficient and proper records.

For things to work well, when an entity realizes that it unlikely to recover its debt from a receivable, it must 'write off' the bad debt from its books. This guarantees or ensures that the entity's assets (i.e. receivables) are not stated above the amount it can reasonably expect to recover which is in line with the concept of prudence in accounting. This paper is limited to more information form UNICS, due to the fact that researcher is out of the country. Also the views about debt recording policy were obtained from one manager within each bank. Because identifying all participants involved in making a good accounting recording in the two banks was impractical. Again, the length and scope of the survey was limited. Therefore, the survey instrument involves a tradeoff between the information needed and the response rate.

It is necessary to fine out whether UNICS failed in 2009 because of inadequate accounting and management control and recording. Therefore, evaluating the efficiency of accounting recording for this bank is necessary. This will mean verifying the way bad debt allowance is estimated and recorded hence give a recommendation.

1.1 Research Motivation

The economy of developing countries as well as that of most developed countries today is poor; to this respect we expect consumer bankruptcies to increase at an alarming rate. As seen in Malhotra and Malhotra (2013), customers and consumer credits have risen from $10 billion in 1946 to almost $2 trillion by 2003. Presently, it stands at nearly $2.5 trillion as indicated by the latest statistics from the Federal Reserve Bank of America.

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EVALUATING THE EFFICIENCY OF ACCOUNTING RECORDING FOR DOUBTFUL AND BAD DEBTS

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