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What is The Importance Of Analyzing Accounts Receivable. Accounts Receivable Financing : An alternative to bank...

What is The Importance Of Analyzing Accounts Receivable.

Accounts Receivable Financing : An alternative to bank financing for your small business

DISCUSS THE ABOVE STATEMENT BY TAKING EXAMPLE OF BUSINESS ORGANIZATION OF YOUR CHOICE.

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MEANING OFACCOUNT RECEIVABLES
Accounts receivable means that the money that customers owe to a business for goods or services that have already been provided. Because the business expects some money in the future, so account receivables are included in the balance sheet.


IMPORTANCE OF ASSESSING ACCOUNTING RECEIVABLES
-   It helps in Assessing and analysing the data of the consumers is a very significant work to do and it has very big impact on company’s financial resources and to meet the expenses.
-   The most significant importance is that Each and every company has it’s own needs to build own guidelines for analysing financial worthiness of the customers.
-   It is great for company’s goodwill to grant credit in form of receivables such as loans, for company’s history, reputation and strength.
-   With granting of the credit, financial services assume certain risks such as failure to predict accurately the bad debts. So, financial services manages credit risk to maintain and improve quality of its customers.
-   This ensures the employing sophisticated credit-scoring to constantly monitor the worthiness of customers.
-   It uses the latest technology to make informed credit decisions for each customer account to limit credit risk exposure.
-   This helps in adopting technology to improve the effectiveness of the collection process.
-   After analysing the environment, with respect to the consumer debt levels, interest rates, employment level and profit levels.


EXAMPLE
1.   A manufacturer will record an account receivable when it delivers a truckload of goods to a customer on June 1 and the customer is allowed to pay in 30 days. From June 1 until the company receives the money, the company will have an account receivable (and the customer will have an account payable).
2.   If a retailer buys wholesale stuff from the wholesaler of $100,000 and is expected to pay $50000 on the spots. And the rest of the amount by the end of the month. So the wholesaler will write the entry as amount receivables in the books of accounts.
ACCOUNTS RECEIVABLE FINANCING: : An alternative to bank financing for your small business.
MEANING OF ACCOUNTS RECEIVABLE FINANCING
Accounts receivable financing, is also known as factoring. It means that a company can sell its account receivable to a finance company or bank. It is a method of selling receivables in order to obtain cash for company operations. Accounts receivable are amounts owed by customers for goods and services a company has sold to those customers.
-   A company can sell its accounts receivables to a finance company or bank.
-   The buyer is called a factor.
-   The amount which is charged to the seller by the factor is called factoring fee. And then collects the receivable after its due date.
-   By incurring a factoring fee, the seller receives cash earlier and passes the risk of bad debts to the factor.
-   The seller also avoids costs of billing and accounting for the receivables.
-   But most small and medium-sized businesses are constantly short of cash, especially those selling on terms.
-   If the company is growing quickly, or had a challenging event in normal business cycle, the cash flow can be increased.
-   But often that delay in collecting accounts receivable is the solution accounting receivable financing can solve the financing puzzle.


-   The journal entry will be:
Cash ………………………….. xxx
Factoring Fee Expenses …………………… xxx
Accounts Receivables……………….. xxx


EXAMPLE
-Let's say Company ABC sells gadgets. It has about $1 million in receivables from customers who have not paid for their gadgets.
-Company ABC needs cash right away because it is trying to finish building a factory. Account receivable is an asset, and as such, it appears on the balance sheet. In particular, Account receivables is a current asset, meaning that the amount owed is expected to be received within the next 12 months.
-Company ABC calls a factor, which purchases the receivables for $750,000. In the deal, Company ABC gets $750,000 right away, and the factor gets the right to all the money from the receivables ($1 million). A factor is a financial institution that purchases receivables from a company. The factor then assumes the risk of customers paying late or not paying at all.


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