Account Receivables

Every business sells products or services to its customers. Accounts receivable represents money entities owe to the firm on the sale of products or services on credit. In most businesses, accounts receivable are executed by generating an invoice and either mailing or electronically delivering it to the customer. In turn, the customer must pay the invoice within an established timeframe, which is called the credit terms or payment terms. The accounts receivable departments use the sales ledger, which normally records:

• The sales a business has made
  
  
• The amount of money received for goods or services
  
  
• The amount of money owed at the end of each month (debtors)

Bookkeeping

On a company's balance sheet, accounts receivable are the money owed to that company by entities outside of the company. The receivables owed by the company's customers are called trade receivables. Account receivables are classified as current assets, assuming they are due within one year. Management is concerned with these funds when considering working capital requirements.

Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account. The first method is the allowance, which establishes an allowance for doubtful accounts or bad debt provisions that reduce the accounts receivable balance. The amount of the bad debt provision can be computed in two ways:

1. By reviewing each debt and deciding whether it is doubtful (a specific provision)
   
   
2. By providing for a fixed percentage (e.g., 2%) of total debtors (a general provision)

The second method is the direct write-off method. It is simpler than the allowance method because it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

Revenue Recognition

A company can choose when to recognize revenue via various accounting methods. Revenue has a big impact on bottom-line profitability, so managers may be tempted to "manage" revenue recognition. Under accrual accounting, a firm can recognize revenue when it has:

• Delivered goods, and the title is transferred to the buyer.
  
  
• Performed all, or a substantial portion of, the services to be provided.
  
  
• Incurred a substantial majority of the costs, and the remaining costs can be reasonably estimated.
  
  
• Received either cash, a receivable, or some other asset for which a reasonably precise value can be assigned or collectibility is reasonably assured.

Managers can sometimes tweak the period revenue is recognized to create a more attractive financial statement for a given circumstance.

Accrual Recognition This chart lays out methods for accruing revenue and expenses in accounting.

Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/working-capital-management-18/accounts-receivable-128/index.html
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