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General allowance are created on the estimate that a certain part of our recievables will not be recovered. They are created on the basis of historical annalysis of recievables. Due to the subjectivity involved in their creation they are no longer allowed under IAS39.
Specific allowance are created in regards to the financial position of a certain debtor of ours. For example one of our debtors might be facing liquidation problems and thus a specific allowance can be created in regards to the specific debtor.
General allowance also called as general debt provision which is based on a percentage applied on the amount of debt overdue loans up to90 days and above..
While specific allowance is created for each specific corporate customer based as proposed by the Credit Risk committee or as per regulatory risk guidelines.
Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable.
The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry may be a percentage of sales or it might be based on an aging analysis of the accounts receivables (also referred to as a percentage of receivables).
When the allowance account is used, the company is anticipating that some accounts will be un collectible in advance of knowing the specific account. As a result the bad debts expense is more closely matched to the sale. When a specific account is identified as un collectible, the Allowance for Doubtful Accounts should be debited and Accounts Receivable should be credited.
General Allowance is5%, if more then its specific allowance
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specific allowance created in respect of specific receivables which are known to be facing serious financial problems or have a trade dispute with the entity &The general allowance may be calculated on the basis of past experience concerning recoverability of debts.
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