Question

An important element in business success is a solid Accounts Receivable management plan. A good plan will help management not only collect monies owed in a timely manner, but also assist them in making decisions regarding credit sales and what should be the company’s policy on extending credit.

Explain the accounting constraint of materiality, and its role in Accounts Receivable.

Provide an explanation as to why accountants care how long it takes to collect AR.

How does poor AR Management impact the organizations profitability?

Answer 1

(A)Accounting constraint of materiality and its role in accounts receivable:

Materiality principle is an exception to the full disclosure principle.As per the full disclosure principle all facts necessary to ensure that the financial statements are fairly presented must be disclosed, whereas the materiality principle requires that the items or events which does not effect the decision making of the user of financial statements need not be disclosed.

The materiality depends not only upon the amount of item but also upon the size of business, level, and nature of information, level of the person/department who makes the judgment about materiality, e.g. a worker reporting to his foreman about the production in grams (e.g. part of kilogram), a foreman to his supervisor in kilograms, a supervisor to his production manager in quintals and the production manager to the top management intones, may be justified about the circumstances

Role in accounts receivables:

A default by a customer who owes only $5000 to a company having net assets of worth $50 million is immaterial to the financial statements of the company.

However, if the amount of default was, say, $5 million, the information would have been material to the financial statements omission of which could cause users to make incorrect business decisions.

(B)Provide an explanation as to why accountants care how long it takes to collect AR:

Accounts receivable management is the process of ensuring that customers pay their dues on time. It helps the businesses to prevent themselves from running out of working capital at any point of time. It also prevents overdue payment or non-payment of the pending amounts of the customers. It builds the businesses financial and liquidity position. A good receivable management contributes to the profitability by reducing the risk of any bad debts. Management is not only about reminding the customers and collecting the money on time. It also involves identifying the reasons for such delays and finding a solution to those issues.

(C)How does poor AR management impact the organizations profitability:

Poor AR management impact the organizations profitability in the following ways

1.Poor AR mangement results in bad debts thereby impacts  the profits of the business.

2. It also impacts the liquidity of the business.