Module 6 Flashcards
(also known as dunning letter) is a notification sent in writing, informing
a consumer of his past due payments. It reminds the debtor of his delinquent payment
owed to a creditor
collection letter
IMPORTANCE OF WRITING A COLLECTION LETTER
- to collect the credit granted to customers
- to keep and retain goodwillof the customer
the best collection letters are those
which bring immediate and favorable results, that is to get the money due to the company.
Even with steady sales and growth, if a company has continual cash flow issues due to
lack of accounts receivable management, that could slow or stop the company’s growth.
to collect the credit granted to customers
collection letters must be written
as to make them appeal to the debtors’ feelings and sentiments. Extreme care should be
exercised so as not to break down the delinquent’s morale
to keep and retain good will of the customers
TYPE OF COLLECTION LETTERS
Reminder
Follow Up
Discussion
Appeal
Demand
This letter is made in case a creditor needs to bring to the attention of
the debtor his existing obligation to the company, with the presumption that the latter must
have overlooked paying the same owing to the busy world that we live in.
reminder
This letter is crafted when one or two reminder letters fail to bring any
response from the debtor. They should still be friendly in tone, but nevertheless, firmer.
The letter should touch on an inquiry on why the debtor has not settled his obligation and
emphasizing the reason why the obligation must be paid by the debtor the soonest
possible time.
follow up
This letter initiates or extends an offer to the customer to help him
in his predicament by discussing it together to avoid any misunderstanding and unpleasant
consequences.
discussion
There ae times that a company may opt not to send a discussion letter
and go directly in making an appeal letter. In this case, the appeal letter could have a
characteristic of both discussion and appeal letter. This letter aims to the customer’s soft
spot — such as making him conscious of the impact of his delinquency on his integrity and
reputation, his standing in the community, his sense of responsibility, etc.
appeal
when the reminder, follow-ups, and appeal letters failed to produce the
desired results, the creditor may realize that he has a problem in his hands hence
the necessity of writing a demand letter. This is a letter which informs the
delinquent debtor of the consequences that befall him when the case is brought to
court
demand
is an expense that a business incurs once the repayment of credit
previously extended to a customer is estimated to be uncollectible. It is a contingency that
must be accounted for by all businesses who extend credit to customers, as there is
always a risk that payment will not be received.
bad debt
usually refers to eliminating an account receivable due to
the customer’s inability to pay the amount owed.
write off a bad account
TWO (2) METHODS IN WRITING-OFF A DEBT
direct write off method
allowance methd
Under the this method, a company writes off a bad account receivable when
a specific account is determined to be uncollectible. This usually occurs many months after the credit sale occurred. The entry to write off the bad account under the direct:
Debit Bad Debts Expense (to report the amount of the loss on the company’s
income statement)
Credit Accounts Receivable (to remove the amount that will not be collected)
direct write off method
a company anticipates that some of its credit sales and
accounts receivable will not be collected and establishes an Allowance for Doubtful
Accounts prior to knowing the specific account or accounts that will become
uncollectible. The Allowance account is established and adjusted with the following
journal entry:
allowance method
