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Accounts Receivable and the External Balance Sheet

In its external balance sheet, a business reports just one summary amount for all its accounts receivable. However, this total amount is not nearly enough information for the business manager.

A business that makes sales on credit has the accounts receivable asset — unless it has collected all its customers’ receivables by the end of the period, which is not very likely. To be more correct, the business has hundreds or thousands of individual accounts receivable from its credit customers.

Here are some key questions a manager should ask about accounts receivable:

  • Of the total amount of accounts receivable, how much is current (within the normal credit terms offered to customers), slightly past due, and seriously past due? A past due receivable causes a delay in cash flow and increases the risk of it becoming a bad debt (a receivable that ends up being partially or wholly uncollectible).

  • Has an adequate amount been recorded for bad debts? Is the company’s method for determining its bad debts expense consistent year to year? Was the estimate of bad debts this period tweaked in order to boost or dampen profit for the period? Has the IRS raised any questions about the company’s method for writing off bad debts?

  • Who owes the most money to the business? (The manager should receive a schedule of customers that shows this information.) Which customers are the slowest payers? Do the sales prices to these customers take into account that they typically do not pay on time?

    It’s also useful to know which customers pay quickly to take advantage of prompt payment discounts. In short, the payment profiles of credit customers are important information for managers.

  • Are there “stray” receivables buried in the accounts receivable total? A business may loan money to its managers and employees or to other businesses. There may be good business reasons for such loans. In any case, these receivables should not be included with accounts receivable, which should be reserved for receivables from credit sales to customers. Other receivables should be listed in a separate schedule.

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