Bad-debt cost in credit policy
In credit-policy appraisal, estimate the cash or contribution effect of irrecoverable customer balances according to the scenario, alongside collection costs and the funds tied up in receivables. A bad debt of $1,000 is not merely the interest that could have been earned on $1,000. The loss and the financing cost are different effects and must be identified consistently to avoid omission or double-counting. Expected loss percentages may apply to all sales or only the affected group; read the basis carefully. Accounting recognition of loss allowances is a separate reporting issue.
Worked example
Credit sales of $500,000 have an expected non-payment rate of 2%, giving $10,000 expected bad-debt cost on the stated sales basis. Separately, an average $40,000 receivables balance funded at 8% has annual financing cost $3,200.
Common mistake
Calculating the bad-debt loss as the unpaid balance multiplied by the interest rate, thereby counting only a financing effect.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |