Do You Know What is Accounts Receivable?

Do You Know What is Accounts Receivable

Some people may feel that the relationship between accounts payables and accounts receivables is so confusing. For us to understand the situation better, let us imagine that we own an automobile factory. One day, our company has bought some raw materials from XYZ Corporation on credit. This means that our company owes an amount of money to XYZ Corporation.

From our perspective, that sum of money is our accounts payable, since we need to pay it to XYZ Corporation. As against, the sum will become the accounts receivable for XYZ Corporation as it is going to receive money from us.

Simple, right? Generally, accounts receivable is the amount of money due from the clients to the company that has provided the goods or services in the normal course of its business operations. In other words, it is the sum of money that the clients owe to the company. This means that the company has sent the goods or has provided the services to the clients, yet it has not collected the amount earned.

Accounts receivable includes the company’s current debtors, as well as other bills receivables, where the clients will normally make the payments in one year. If business owners want to know the amount of money that their business can actually collect, they should not just sum up all the amounts of accounts receivables and think that their job is done, and they just need to wait for the money to get into their pockets. They should consider the uncertainty in the payment collection, and hence, they need to understand the difference between gross accounts receivables and net accounts receivables.

The gross accounts receivable (Also see Does Your Company Prepare Accounts Receivable Aging Report?) refers to the sum of receivables which are due to their business. The gross accounts receivable does not consider that situation where the clients may not make the payment; that is, the client may default. On the other hand, net accounts receivables take the amount of money that the clients may not pay to them into account in its calculation. To calculate this, business owners should estimate the amount of credit sales that may turn into bad debt. This is known as the allowance for doubtful accounts. Then, they should minus the estimated amount from the gross accounts receivable to arrive at the net accounts receivable.

The amount that the company has estimated that it will become bad debt will appear in the profit and loss statement as the company’s bad debt expense. Usually, the accountants will charge this amount to the selling, general and administrative expenses in the profit and loss statement.

Accounts receivable is one of the current assets of a company, and hence, business owners should handle them carefully. If they are not sure about the accounting treatments regarding accounts receivables, seeking help from a bookkeeping firm in Singapore would be a smart move. Doing so prevents themselves from messing up their books of accounts so that the financial statements can reflect the true financial condition of their company.