The Importance of Accounts Receivable
Accounts Receivable is the basic account name for money owed to a company by its clients. It is tape-recorded as an asset on the balance sheet. Accounts Receivable and Sales are married at the hip per se. If a sale is made, however the business hasn’t got the cash from its client, the profits are tape-recorded as Accounts Receivable. Sales and Fees Made are interchangeable in accrual based accounting, however those account names depend on the collection approach being utilized.
A business needs to likewise develop payment terms.
These terms are generally net 30, net 45, or net 60. These are indications of the date on the invoice and the amount is due x amount of days from the date on the invoice. Some companies provide a discount rate for early payment and in my viewpoint, organisations that do not use a discount rate needs to do so in the interest of customer relations. The Accounts Receivable account is accompanied by a contra-account referred to as, allowance for uncertain accounts.
This contra-account also appears on the balance sheet. The allowance for doubtful accounts goes through the technique of collection.
There are two common approaches of collection: percent of accounts and aging of receivables. Receivables are generally aged according to a chart. Each chart is distinct to business, but the classifications are typically separated by 30-day intervals. The percent of accounts works via a quote. A common example would appear as such:
Warner Business’s year end unadjusted trial balance reveals accounts receivable of $99,000. Allowance for skeptical accounts of $600 (credit) and sales of 0,000.
Uncollectables are approximated to be 1.5% of account receivable.
- Prepare the December 31 year-end adjusting entries for uncollectables.
- What quantity would have been used in the year-end changing entries if the allowance account had a year-end unadjusted debit balance of $300?
Though both methods are unique, both methods affect the general ledger; adjustments must be made under both methods. In the case above, 1.5% is multiplied by 99,000. $300 is then added to that amount and the adjustment is recorded. It is also useful to know that both methods can be used by one business. A business can choose to use one method for client A and another method for client D. Of course, this use of two methods would have to be reported to the IRS. However, it is understood that one method may not suit a particular client while that same method can suit other clients.
Why are receivables important? Receivables are important because a business can perform a good or service on credit terms. Furthermore, it goes a long way in improving client relations because a client isn’t bound to pay for a good or service immediately. We can agree that there is risk involved, but that is the nature of business – an endeavor of risk and reward. Receivables are crucial to any business using the accrual method and they are perhaps one of the bigger reasons why the accrual method has been embraced by most businesses.
