Types of Receivables

The term receivables refers to amounts due from individuals and companies. Receivables are
claims that are expected to be collected in cash. The management of receivables is a very
important activity for any company that sells goods or services on credit.
Accounts Receivable
Three accounting issues associated with accounts receivable are:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable
Recognizing accounts receivable is relatively straightforward. A service organization
records a receivable when it provides service on account. A merchandiser records accounts
receivable at the point of sale of merchandise on account. When a merchandiser sells goods,
it increases (debits) Accounts Receivable and increases (credits) Sales Revenue.
Valuing Accounts Receivable
Once companies record receivables in the accounts, the next question is: How
should they report receivables in the fi nancial statements? Companies report
accounts receivable on the statement of fi nancial position as an asset. But determining the
amount to report is sometimes diffi cult because some receivables
will become uncollectible.Each customer must satisfy the credit requirements of the seller
before the
credit sale is approved. Inevitably, though, some accounts receivable become uncollectible.
For example, a customer may not be able to pay because of a decline in its sales revenue due
to a downturn in the economy
Statement Presentation and Analysis
Presentation
Companies should identify in the statement of fi nancial position or in the notes
to the fi nancial statements each of the major types of receivables. Shortterm receivables
appear in the current assets section of the statement of fi nancial position. Shortterm
investments appear after shorterm receivables because these investments are more liquid
(nearer to cash). Companies report both the gross
amount of receivables and the allowance for doubtful accounts.in an income statement,
companies report bad debt expense and service
charge expense as selling expenses in the operating expenses section. Interest
revenue appears under “Other income and expense” in the non operating activities section of
the income statement.
Analysis
Investors and corporate managers compute fi nancial ratios to evaluate the liquidity of a
company’s accounts receivable. They use the accounts receivable turnover ratio to assess the
liquidity of the receivables. This ratio measures the number of times, on average, the
company collects accounts receivable during the period. It is computed by dividing net credit
sales (net sales less cash sales) by the average net accounts receivable during the year. Unless
seasonal factors are signifi cant, average net accounts receivable outstanding can be
computed from the beginning and ending balances of net accounts receivable.