THE OWNER(S) of a business should be very much aware that some customers that have received the goods on credit may never manage to pay the balances on their accounts.  If you sell goods or offer services on credit and they are not paid for, that is an expense to the business.

 

“Accounts receivables” refer to those current assets that report the amount of money that the customers owe the business for the services or goods that have been provided on credit terms. Under the accrual accounting principle, the business is required to credit the revenue account and debit the accounts receivable when it is billing its customers. After the collection of the accounts receivable, the accountant should debit the cash and credit the accounts receivable. All that technical talk aside, “accounts receivables” are simply money that is owed to you for services already performed or goods already received.

 

When you eat out at a restaurant, after you’ve finished your meal, the waiter delivers you a statement of his accounts receivable—otherwise known as a bill. You’ve already eaten the food, now it’s time to pay for it.

 

Businesses that provide credit to their customers face the risk of not being able to collect on the account receivable. If a real loss occurs because of the extension of credit, it should be recorded as a bad debts expenditure. There are two main ways of reporting the losses that have been incurred from the sales on credit. These are the write-off method and the allowance method.

 

In the write-off method, the business does not anticipate the loss. Because of this, the accounts receivable of the assets is reported in its total amount. No expenditure is reported until such a time when it is certainly known that the customer will not really pay the amount of money that is owed to the business.  Most accountants do not encourage the use of this method because it may lead to the overstating of the net income and assets.

 

The recommended way of reporting the losses that have been incurred from the sales in credit is the allowance method.  The allowance method works by anticipating that some of the receivables may indeed not be collected. From the allowance account, the credit balance works in order to evaluate the accounts receivable at the approximate net amount that is realizable. Under this method, the allowance account credit and bad debts expense is reported at the closest point to the time of selling.  This provides the better matching with the business revenues. Also in this method, the accounts receivables are recorded and reported in more conservative and realistic amount.

 

In order to assist in the management of the accounts receivables, the accounts receivable aging is prepared. The aging sorts the balances of the customers depending on the duration of time in which the customers have owed to the business the amounts of the open invoice. The sales on credit basically involve the terms of credit such as "2/10, net 30" or "net 30 days" or "net 10 days” among others. 

 

“Net 30” means that there is no allowance of discount from the amount that is indicated in the sales invoice.  The “2/10, net 30” means that the customer may remit 2% less the amount of invoice if he/she pays the amount of money owed to the business within a period of 10 days…in any other case, the full amount owed to the business is due within a period of 30 days.