CREDIT AND COLLECTION

Rachel Ann P. Razonable

BSBA FM 3-A
EXERCISES:
Instruction: Answer the following in a short and concise manner.
1. What is a problem account?
It has been defined as one “In which there is a major breakdown in the repayment agreement
resulting in an undue delay in collection, or in which it appears legal action may be required to
effect collection, or in which there appears to be a potential loss.
2. Discuss the different ways of monitoring the firm’s accounts receivable.
 Aging
In aging the accounts receivable, the customers’ accounts are listed and the items therein
classified according to whether they are not yet due, just due, a little past due, or
considerably past due. Each of these classes is examined for items that should be
separately valued and the remainder are evaluated by average percentages which increase
with the age of the items. The older the account after becoming past due, the less
likelihood of its being collected.
 Analysis of Receivables
The analysis of receivables includes the computation or an account receivable turnover
ratio and the presentation of other reports which are designed to reflect activity and the
efficiency of the credit and collection function.
 Accounts Receivables Turnover Ratio
The turnover of account receivable may be calculated by finding the relationship between
the average balance of the book accounts and the credit sales for the period. Thus, if the
credit sales for the month is ₱90,000 and the average daily outstanding balance is
₱45,000, the monthly turnover is two or 200%. The average balance outstanding should
be determined through the use of daily or weekly balances; at least, the period should not
be so long that the effect of seasonal fluctuations is lost sight of.
 Collection Efficiency
A method of comparing funds actually collected with the funds available for collection. It
evaluates the performance of the collection effort (unlike turnover) since it is not a
function of terms of sale. It also offers a method of comparing collection performance of
different Autonomous Companies.
3. What should a credit man do in interviewing a debtor with a problem account?
1. An interviewer has a plan.
2. An interviewer has adequate account knowledge.
 3. An interviewer has adequate background information on client.
4. An interviewer schedule interviews so that he has enough time.
5. An interviewer insures that interviews are held in private.
6. An interviewer puts the applicant at ease.
7. An interviewer lets the applicant talk.
8. An interviewer avoids leading questions.
9. An interviewer adjusts the level of his language to the ability of respondent.
10. An interviewer keeps control of the interview.
11. An interviewer is aware of his own prejudices and tries to avoid their influences on the
judgement.
12. An interviewer knows how and when to close the interview
13. An interviewer records the facts during the interview and impression and judgements
immediately thereafter.
4. What are the processes in analyzing a problem account?
a. a review of the financial statements of the debtor
b. a review of the debtor’s account history
c. a review of the supporting documents to find out if there are any defects or deficiencies
that must be corrected
d. an ocular inspection of the business and a re-appraisal of the collaterals or security of the
loan or credit extension, possibly also include an appraisal of the debtor’s other assets
e. and, of course, as earlier described, an interview of the debtor
5. What is skip tracing? Procedures in skip tracing.
Skip Tracing
▪ Skip tracing is the art of locating a debtor, who is missing intentionally (who does not
want to be found) or unintentionally. Skip tracing is needed in order to collect on
overdue accounts receivable.
Procedures in skip tracing
1. Examine and study the credit application and credit investigation reports of the missing
customer by getting the various aid in skip tracing.
2. After getting all necessary data, proceed to conduct the tracing, skip tracing consist of two (2)
stages, office and field, field checking will be resorted to only when office training fails.
3. Office tracing. This is done by office collection over the telephone.
(1) Address all the present place of employment.
(2) Respective addresses of the relatives, friends, and/or references mentioned by the
missing customer in the credit application.
(3) Go to the central office of the local power company
 (4) Proceed to the main office of the waterworks company or its different branches or
local
water company and inquire about the new address of the missing customer.
(5) Proceed to the central office/main office or regional, or local offices of the Social
Security System (SSS) or Government Service Insurance System (GATS), if the
customer is a private employee or a government employee.
(6) In case of businessmen, checking may be made with the office of the Department of
Trade and Industry Bureau of Domestic Trade and/or Securities and Exchange
Commission.