In an organizational point of view, accounts receivable is considered as a crucial factor for the working capital of the company. Therefore, in this article, we will learn how to calculate accounts receivable; it is expected to identify the ways of calculating the accounts receivables within a certain time period.
When the buyers are purchasing goods from the sellers on credit, it is recorded in books as accounts receivable.It is recorded under the current assets in the seller’s balance sheet. The credit limit that is allowed to a customer to buy the goods or services from the organization is decided based on the financial capability and the payment history of the buyer. The credit period varies from 30, 60 or 90 days. The credit limit may also vary according to the desire of the seller. If the total amount of accounts receivables / debtors is high, it means that most of the customers owe to the organization as they have bought the goods on credit terms. That directly affects the company’s normal operations as they do not have adequate cash for the payments. If the account receivables is comparatively less in amount, it means that the company restricts the opportunities to their customers to buy the goods on credit. It is a factor which affects the sales revenue of the company.
Accounting for Receivables
Double entry for credit sales can be recorded as follows:
|Credit||Sales Revenue (Income Statement)|
When the receivables pay the amount due, then it can be recorded as follows:
Using the account receivable formula to calculate account receivable days:
Accounts Receivable Turnover = (Credit Sales)/(Average accounts receivables)*365 days
The answer derived in the above formula helps to identify the exact time period the cash is received for the credit sales.
In some cases, there are situations where the debts cannot be collected from the customers and therefore the companies offer allowances for them (allowances for doubtful debts) to provide more convenience for them to pay the due amount. It’s a kind of a reserve for the bad debts. Therefore the total amount of receivables is a combination of the balance in the account receivables and the allowances offered to the debtors.
Double entry for doubtful debts
Double entry for doubtful debts can be illustrated as follows:
|Debit||Allowance for doubtful debts (Expense)|
|Credit||Allowance for doubtful debts (Balance Sheet)|
If the customer does not pay the outstanding amount, it is identified as irrecoverable debts/ bad debts. This may occur due to various reasons like the customer is going bankrupt or caught in a fraud. Double entry for bad debts can be recorded as below;
|Debit||Bad debt Expense|
In the organization’s point of view, it is so important to somehow recover the amounts due from their customers and limit number of sales in credit terms. As discussed above, these various methods of accounting principles are very much essential to know in order to maintain effective accounting practices.