In: Accounting
Answer :-
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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.