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Age Analysis, Bookkeeping and Special uses of AR PDF Print E-mail
Written by Cecilia Chee, Singapore   
Monday, 03 October 2011 18:35

 

Accounts Receivable Age Analysis

The Accounts Receivable Age Analysis Printout , also known as the Debtors Book is divided in categories for current , 30 days , 60 days , 90 days , 120 days , 150 days and 180 days and over due that are produced in Modern Accounting Systems. The printout is done in the order of the Chart of Accounts for the Accounts Receivable and/or Debtors Book. The option to include Zero Balances outstanding or to specifically leave it out is also possible in the printout features.


Bookkeeping

On a company's balance sheet, accounts receivable is the money owed to that company by entities outside of the company. The receivables owed by the company's customers are called trade receivables. Account receivables are classified as current assets assuming that they are due within one year. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is usually a debit.

Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software on a computer to perform this task.

Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.

The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways, either (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision); or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.

The second method is the direct write-off method. It is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts, writing off specific debts that they know to be bad (for example, if the debtor has gone into liquidation.)


Special uses

Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending). They may also sell them throughfactoring or on an exchange. Pools or portfolios of accounts receivable can be sold in capital markets through securitization.

For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts consistent with their past experience of customer payments, in order to avoid over-stating debtors in the balance sheet.

Last Updated on Monday, 03 October 2011 19:38
 
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