June 20, 2012
The Importance of Accounts Receivable
Accounts Receivable is the general account name for money owed to a business by its customers. It is recorded as an asset on the balance sheet. Accounts Receivable and Sales are married at the hip per se. If a sale is made, but the business hasn’t received the money from its client, the earnings are recorded as Accounts Receivable. Sales and Fees Earned are interchangeable in accrual based accounting, but those account names depend on the collection method being used.
A business must also establish payment terms. These terms are usually net 30, net 45, or net 60. These are indicators of the date on the invoice and the amount is due x amount of days from the date on the invoice. Some businesses offer a discount for early payment and in my opinion, businesses that do not offer a discount should do so in the interest of client relations. The Accounts Receivable account is accompanied by a contra-account known as, allowance for doubtful accounts. This contra-account also appears on the balance sheet. The allowance for doubtful accounts is subject to the method of collection.
There are two common methods of collection: percent of accounts and aging of receivables. Receivables are usually aged according to a chart. Each chart is unique to the business, but the categories are usually separated by 30-day intervals. The percent of accounts works via an estimate. A common example would appear as such:
Warner Company's year end unadjusted trial balance shows accounts receivable of $99,000. Allowance for doubtful accounts of $600 (credit) and sales of $280,000. Uncollectables are estimated to be 1.5% of account receivable.
1. Prepare the December 31 year-end adjusting entries for uncollectables. 2. What amount would have been used in the year-end adjusting entries if the allowance account had a year-end unadjusted debit balance of $300?
Though both methods are...