Accounts

Receivable
Management
Neris Sabado
Arnold Batausa
Helen Yvonne V. Roa
Accounts Receivable

• Arise from credit sales to customers

• Often referred to as TRADE RECEIVABLES
• Other receivables:
Interest receivable
Rent receivable
Tax Refund receivable
Companies selling an account need to:

• 1. Maintain a separate account for each customer

• 2. Account for bad debts
Valuing Accounts Payable

• .Some customers who are granted credit do not pay what they promised
• The accounts of these customers are called UNCOLLECTIBLE ACCOUNTS or
BAD DEBTS
Methods for Accounting for Uncollectible Accounts:

• 1. ALLOWANCE METHOD – satisfies matching principle by matching

expected bad debt losses (expenses) with revenues that produce the losses;
adjustments for bad debts are made at the end of the accounting period
• - adjustments use a contra-asset account called ALLOWANCE FOR
DOUBTFUL ACCOUNTS
• - an allowance account is used since we do not know which accounts will be
uncollectible
Methods of Accounting for
Uncollectible Accounts
• 2. Direct Write – Off Method
• Sometimes used as an alternative to the allowance method when uncollectible
accounts are not material
• The loss from an uncollectible account is recorded when it is determined to be
uncollectible
• This method does not satisfy the principles of matching and conservatism
Estimating Bad Debt Expense

• Acceptable Methods:
1. Percent of Sales Approach
2. Accounts Receivable Approach
Estimating Bad Debt Expense

• Percent of Sales Approach

• Also referred to as the Income Statement Approach
• Based on the idea that a percentage of a company’s sales are uncollectible
• The primary focus is on estimating bad debt expense for the income statement
• Current Period Credit Sales x Estimated Bad Debt % = Estimated Bad
Debts Expense
Estimating Bad Debt Expense

• 2. Percent of Accounts Receivable Approach

• This method assumes that a percentage of accounts receivable
is uncollectible
. Using this method, we compute the estimate of the
ALLOWANCE for DOUBTFUL ACCOUNTS as follows:
Year-end accounts receivable x Bad Debt %
. Bad Debt Expense (estimated) = estimated adjusted balance in allowance for
doubtful accounts – unadjusted yr-end balance in allowance for doubtful accounts
Aging of Accounts Receivable
Approach
Assumes that the older the account receivables the more likely it will
become uncollectible

Steps:

1) Group accounts based in how much time has passed since they were
created

2) Estimate rates of uncollectibility for each group

3.) Apply rate to each group to get the required balance for the allowance
account
 Aging of Accounts
Receivable
• Example: At December 31, the receivables for ABC Co. were classified as follows:
Schedule of Accts receivable by Age 31 Dec 06
Days Past Due A/R Balance Estimated Bad Debts % Estimated Uncollectible Amt
Current $40,000. 2% $ 800
1-30 5,000. 5% 250
31-60 4,000. 10%. 400
61-90. 2,000. 25%. 500
Over 90 1,000. 40% 400
$ 52,000 $ 2,350
Aging Schedule

• Breaks down a firm’s receivables by age of acct

• Management should constantly monitor both the Days Sales Outstanding (DSO)
and the aging schedule to detect any trends to see how the firm’s collection
experience compares with its credit terms, and to see how effectively the credit
department is operating in comparison with other firms in the industry.
Short-Term Promissory Notes
Notes - a written promise to pay a specified amount of money
Receivable either on demand or at a definite future date

Short-Term Notes Receivable

- a promissory note that becomes due within 12 months or

within the firm’s operating cycle

- usually interest bearing; interest rates are stated on an

annual basis

Interest Rate= Principal of the Note x Annual Interest Rate

x Time in yrs
Converting Companies may need the cash

Receivables to
Cash Before Companies do not want to be involved in the
collection activities
Maturity
Conversion of receivables into cash is
accompanied by either:

1) Selling them to a factor

2) Pledging them as loan security

Ratios

• The quality (likelihood of collection) and liquidity

( speed of collection)of a company’s receivables may be
assessed by calculating:
• 1) Accounts receivable turnover ratio
• 2) Days’ sales uncollected
• Accounts Receivable Turnover= Net Credit
Sales/Average Accts receivable
• Days’ Sales Uncollected = Average accounts
receivable/Net sales x 365
Credit Policy

• Credit Policy consists of the following variables:

• 1) Credit Period. A firm might sell in terms of “net 30” which means that the customer must pay within
30 days.
• 2) Discounts . If the credit terms are stated as ”2/10 net 30” then buyers may deduct 2% of the purchase
price if payment is made within 10 days, otherwise the full amount must be paid within 30 days.
• 3) Credit standards. How much financial strength must a customer show to qualify for credit? Lower
credit standards boost sales, but they also increase bad debts.
• 4) Collection Policy. How tough or lax is a company attempting to collect slow-paying accts? A tough
policy may speed up collections, but it might also anger customers and cause them to take their business
elsewhere
The The total amount of A/R outstanding at any
Accumulation given time is determined by 2 factors:
of Receivables
1. The credit sales per day

2. The average length of time it takes to

collect cash on A/R

Accounts Receivable = Credit Sales per day x

Length of collection period
Monitoring the
Receivables
Position
• Both investors and bank
loan officers should pay
close attention to A/R,
because what you see in a
financial statement is not
necessarily what you end up
getting.
Days Sales Outstanding
(DSO)
• -- sometimes called the Average Collection Period (ACP)
• - a measure of the average length of time it takes the
firm’s customers to pay off their credit purchases
• - DSO = Receivables/Sales per day
• - DSO = Accts Receivable
• Annual sales/365
•
Average Daily Sales

Average Daily Sales (ADS)

ADS = Annual Sales/365

= (Units sold)(Sales Price)/365

Receivables

• Receivables = DSO x ADS