Account receivables are the amount owes by other entities or people as the result of purchasing goods or rendering services without making payments at the time goods or services are delivered. This happens when the entity sells its goods or services to the customer.
In daily business activities, the customers would love to purchase the goods on credit. Even some of the entities might make payment at the time they purchase.
But most of them don’t. They buy now and pay later. The entity might do some assessment of the credibility of their customers before they provide credit sales.
From the accounting point of view, such transactions are called accounts receivable and they have to be recorded in the financial statements with respect to all relevant accounting policies, concepts, and standards.
In the daily sales transactions, the entity offer goods or services to its customers. At the time of delivery of those goods or services, some customers pay immediately and some of those wait to make payment later.
If the customers make payments immediately, then there are no accounts receivable that should record on the balance sheet.
However, if the goods or services are delivered to customers, and the payment is not made. Then, the entity should record it as accounts receivable on that day on the balance sheet.
For example, the amount of goods is 1,000 USD which means the amount to be received from customers is also 1,000 USD. The double entity for this transaction should be,
Debit account receivable amount 1,000 USD, and then credit account receivable amount 1,000 USD. Account receivable is under current assets on the balance sheet.
These accounts receivable stays on the balance sheet until the customer makes the payment or the company has written it off.
At the time of payment, the accounting treatment of this transaction would be,
Debit cash/bank 1,000 USD depending on the types of payments and then credit account receivables the same amount. At this time, the account receivable will turn to zero.
Accounts receivable recognition:
Account receivable is the company’s assets and its recognition and measurement should respect the definition of assets as per the IFRS framework.
In general, the entity should recognize accounts receivable in its balance sheet the same it recognizes revenues that correlated with the AR in the income statement.
That means when the entity recognizes sales transactions as revenue in the income statement, and the account receivable should also recognize in the balance sheet as well.
For example, if the sales transaction is 1,000 USD and the customer is not making the payment at the time sales transactions is made, the entity should record both recognized sales and account receivable in its financial statements as follow:
- Credit sales transactions amount to 1,000 USD in the income statement to recognize sales that the entity made.
- Debit account receivable under current assets 1,000 USD in the balance sheet to recognize receivable that entity expected to receivable from its customers.
Account receivable aging report refers to the report that summarizes all of the accounts receivable by their ages of outstanding.
Normally, the reports classify those outstanding account receivable into different ages rank from under 30 days, from 30 to 60 Days, from 60 to 90 day and over 90 days.
This report serves management as the analytic reports and to help them take better action on the long outstanding.
For example, management should review the collection policy if the proportion of outstanding account receivable over 90 days are high compared to total outstanding.
Also, management should consider taking some actions like legal action to those customers whose outstanding longer than 90 days.
Now, most of the company use the accounting system to records its financial statements and account receivable aging report normally automatically calculated.
So to get this kind of report for management, the accountant does not require to manually prepare it.
This report is also normally obtained by the auditor during their audit on the entity’s financial statements.
Normally, the auditor obtains this report to access the likelihood of overstated the accounts receivable. For example, the auditor will review why there is a large amount of long term outstanding.
Why managing accounts receivable is important?
Account receivable is part of the company’s liquid assets. What I mean by that is the company expected that its accounts receivable could be converted into cash in less than one year.
This is the reason why managing account receivable is very important for the company.
Here are the advantages of good management of accounts receivable:
- Have enough cash for operating activities
- Earn interest from bank deposit
- Not spend too much employee time chasing with customers
- Have a better relationship with customers
- Better receivable turnover ratio
- Company financial statements look healthy