Question

Accounts receivable 17,932,000,000 is services that have been provided that haven't been paid and is promised to be paid at a later time.

Allowance for Doubtful Accounts 58,000,000 according to the book are the accounts that are assessment of various factors like the age of account and credit quality and the customers ability to pay. So accounts that basically didn't get paid at a promised date or time when services were rendered to them.

Accounts Receivable Net 17,932,000,000-58,000,000= 17,874,000,000 is the amount that you get when you subtract the Allowance for doubtful accounts from accounts receivable.

Respond to the above paragraphs with additional information in your own words in two paragraphs.

Answer 1

Paragraph 1:-

Accounts receivable 17,932,000,000 is services that have been provided that haven't been paid and is promised to be paid at a later time.

When a business sells goods or offers services to its customers, it gives them the flexibility to pay in cash immediately or pay within a specified period of time. This balance is an asset to the selling company because the services have already been performed/goods have been sold already. Hence, such balances are reported as part of the Accounts Receivable balance.

As per the statement, the company has provided services worth $17,932,000,000 . However, the payment for these services is yet to be received by the company. The company holds right to such payments and hence reports such balances as part of the Accounts Receivable. In simple words, it is the money that your customer owes you for the services received by him.

Paragraph 2:-

Allowance for Doubtful Accounts 58,000,000 according to the book are the accounts that are assessment of various factors like the age of account and credit quality and the customers ability to pay. So accounts that basically didn't get paid at a promised date or time when services were rendered to them.

It is natural that there is always an element of uncertainty involved about the collectability of the accounts receivable when there are multiple customers that owe their money to you. This uncertainty can be attributed to the debtor's (customers) inability to pay, bankruptcy, etc because of which the entire amount of accounts receivable may not be collectible. Hence, it becomes imperative for a company to create a provision to account for such uncollectible amounts.

The company creates an allowance known as Allowance for doubtful accounts to record such uncollectibles. This allowance is created from the assets of the company, allocating a certain portion to the allowance account , so that in case there are any Bad debts(customer defaulting to pay), this amount is settled from such allowance account. This allowance account is prepared based on multiple factors like Aging schedule(where a business categorizes the uncollectibles based on the number of days the balance is due), competitor analysis, debtors history of payments, etc.

Paragraph 3:

Accounts Receivable Net 17,932,000,000-58,000,000= 17,874,000,000 is the amount that you get when you subtract the Allowance for doubtful accounts from accounts receivable.

When a company reports the Accounts receivable balance on the balance sheet, it represents the rights of the company to such amounts. However, as mentioned in paragraph 2, it becomes imperative for the company to expect that a portion of its Accounts Receivable will be uncollectible. Hence, the company creates an Allowance for Doubtful accounts.

Within the Balance sheet, the company will reduce the balance of this Allowance for uncollectible accounts in order to reflect the "true and fair" view of its accounts receivable. With respect to the above case, the $17,847,000,000 balance in the accounts receivable account is the result of deducting the balance of allowance account of $58,000,000 from the actual accounts receivable balance reported by the company. The net balance of $17,847,000,000 is the amount that the company estimates that it would realize from its debtors.

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