Types of Accounts Receivable Management
A receivable is an amount due to a company from customers or other businesses. Accounts receivable refer to money owed by customers on an account. Often, the accounts result from the sale of goods or services. Generally, companies expect to collect on their claims within 30 to 60 days. Accounts receivable may represent a large portion of a companies claims and income, especially in the service and utility industries. Accounts receivable management is a function of a company’s accounting department.
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Recognition and Recording
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Accounts receivable are recognized and recorded as a type of sale on credit. The sale is recorded as soon as the goods are transferred to the customer or the service is rendered, even though the cash hasn’t been received. Accountants record the transaction as an increase to debits, labeled as “Accounts Receivable,” and an increase to credits as sales income. Sometimes, companies will offer a discount for prompt payments on accounts receivable or charge for going over the allotted payment period. In the case of discounts and overage charges, the sale is recorded at the discounted rate, and the full rate is added if the account goes over the allotted payment time.
Uncollectible Accounts Receivable
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Since accounts receivable sales are a type of credit extended by the company, the business runs the risk of extending goods or services to customers who never pay for the product. Accountants record unpaid accounts receivable as a deduction to credits and a loss to debits labeled as “Bad Debts Expenses” or “Uncollectible Accounts Expenses.” Company losses due to uncollectible accounts receivable are considered a normal risk of conducting business on a credit basis.
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Valuation
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Uncollectible accounts receivable must be valued to determine how much the business lost by extending the credit. The valuation is what the accountant deducts from credits and debits when the account is deemed uncollectible. Methods of accounts receivable valuation include the direct write-off method and the allowance method. Under the direct write-off method, accountants deduct the gross (total) cost. Under the allowance method, accountants subtract the net cost of the loss, which is the cost adjusted for several variables including the cost of attempting to collect the debt and how much cash the company expects to receive on the overdue account.
Selling Accounts Receivables
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Sometimes, businesses sell their accounts receivable to other companies. This usually happens for one of two reasons: The company is strapped for cash, or the company does not wish to incur debt collection expenses. Businesses may sell their accounts receivables to banks or collection agencies that then attempt to collect the debts directly from the original customers.
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References
- “Financial Accounting, Sixth Edition;” Jerry J. Weygandt, et al.; 2008
- Principles of Accounting: Accounts Receivable
Resources
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