Question

The bank manager's first question is regarding revenue and your process for handling accounts receivables and uncollectible accounts. The bank knows that it is common in your line of business to collect deposits up front for an event but that some events are cancelled or the event is held as planned, but payment is not received in full.

In a 1-2 page memo, address the concerns of the bank manager. Be specific regarding the types of methods that are available for accounting for receivables such as those covered in Chapter 9. Discuss potential ways you could encourage timely payment and/or what your credit terms will be. Give examples where appropriate. Be sure to follow APA format and include in-text citations as well as a reference page following your memo.

Answer 1

Businesses operates by enabling their clients to buy goods in credit. The cost of sales on credit is what is referred to as Accounts Receivable. Generally, Accounts Receivable (AR), are the amount of money owed to the company by buyers for goods and services rendered.

If a company has Receivables/uncollectible accounts, then they’ve made a sale/deposited money, but have not yet collected the money from the purchaser/Party.

The accounts receivable process includes setting up procedures for extending credit, generating invoices, maintaining records of payments due and payments received, and performing accounting functions.

It is advisable for a company to setup an process to determine the customers that have already paid and identify any payments that are overdue.

Four Main Steps for a Typical Account receivable Process:

1.Extending credit practices : The company can decide based on the credit-worthiness of the customers, as to whether they will get goods/services on credit. The company might choose to offer the credit to individual customers or other businesses. Also, the company will establish terms and conditions for credit sales. The document outlines the client’s obligations and requirements. The firm must ensure that it complies with Federal laws on credit, such as full disclosure of the credit practices. For example, the company has to clearly communicate the interest rates for the credit.

2.Invoicing : An invoice is a document provided to the buyer detailing the products and services that have been rendered, the costs of those products and services, as well as the date payment is expected. Each invoice has to have a unique invoice number for easy retrieval.

3.Maintaing Ageing of accounts receivable: All outstanding accounts receivable are compiled into the accounts receivable aging report, which is typically structured to show invoices that are current, overdue by 0 to 30 days, by 31 to 60 days, 61 to 90 days, or 90+ days.The officer also reconciles the AR ledger to be certain that all the payments are accounted for and properly posted, and then issues monthly statements to clients. The statement provides details for the customers about the amounts owed as per previously sent invoices.

4. Accounting : The Collections Officer establishes the due date for payments. After identification of unpaid debts, the account department makes journal entries to record the sales. The process involves both accounting for bad debt, or the unpaid debts, as well as identifying early payment discounts.

Types of accounting :

1. Accounting Receivable accounting :

When you sell services to a customer, you normally create an invoice in your accounting software, which automatically creates an entry to credit the sales account and debit the accounts receivable account. When the customer later pays the invoice, you would debit the cash account and credit the accounts receivable account.

For example, ABC International billings a customer for $10,000 in services, and records the following entry:

Accounts Receivable                                                        Debit ……..18000

         To Sales                                                                   Credit……………..18000

1. Direct write off method for Uncollectible receivables:

Unfortunately, some times customers refuse to pay, or may become incapable of paying amount due , etc. Of course, a company does have legal recourse to try to collect such accounts, but those often fail. As a result, it becomes necessary to establish an accounting process for measuring and reporting these uncollectible items. Uncollectible accounts are frequently called “bad debts.”

A simple method to account for uncollectible accounts is the direct write-off approach. Under this technique, a specific account receivable is removed from the accounting records at the time it is finally determined to be uncollectible. The appropriate entry for the direct write-off approach is as follows:

For example , In March, ABC clearly identifies $18,000 of invoices that will not be paid. It uses the following entry to eliminate the invoices and draw down the reserve balance:

Uncollectible Account expense/ Written off exp             Debit ……..18000

         To Accounts Receivable                                         Credit……………..18000

Given entry reduces the receivables balance for the item that is uncollectible. The offsetting debit is to an expense account: Uncollectible Accounts Expense.

1. Accounting for Early Payment Discounts:

If you offer customers a discount if they pay early and they take advantage of the offer, then they will pay an amount less than the invoice total. You need to eliminate this residual balance by charging it to the sales discounts account, which will appear in the income statement as a profit reduction.

For example, ABC International offers a $100 discount to a customer if it pays a $2,000 invoice within 10 days of the invoice date. The customer does so. ABC uses the following entry to record the transaction:

Cash A/c                                                                             Debit………1900

Sales Discount                                                                    Debit………..100

    To Accounts Receivable                                                Credit………………2000

Potential ways to encourage timely payments from accounts receivables :

1. Credibility check of customers : If you are going to offer credit, do some snooping to find out if your new customers are worthy of your time and effort.
2. Documentation : If your customer won’t pay half / any decided percentage of bill amount upfront, get an agreement for them to pay half the bill at the onset of the project and the other half after completion as a sign of good faith.
3. Invoicing Quickly : If you do offer credit, you should send your invoice to your client as soon as possible. Don’t wait until your bookkeeper is ready or your accounts department gets around to it.
4. Flexibility with Payment type : While some clients want to pay by check, credit card or online payment system, others prefer direct deposit. Opening up your payment options gives clients every reason to get you paid on time.
5. Provide a Discount for Early Payment : Reward your good customers by offering a discount up front, if they pay on time. This can be a percentage of the total invoice amount, which often adds up for clients as a cost advantage.
6. Put Penalties in Your Contract: If they do not pay on time, they must be penalised. Otherwise, you are offering free credit. You are not a bank, so don’t let them treat you like one. It’s essential to have a written agreement between you and the client that clearly outlines the terms, deadlines, fees and other essentials.