Accounts Receivables - Benefits and Methods
Account receivables are the credit owed by a customer to a company or a business. An invoice is generated for the product or a service purchased by a customer. But the customer is given the flexibility to pay the amount at a later point of time and this kind of transaction is recorded as Accounts receivables. But when the customer does not pay the credit owed to a company it is considered as Bad Debts. Accounts receivables is a debit account, but the amount is credited to the sales account.
Accounts Receivable Methods:
There are two methods followed in bookkeeping for account receivables, one is the allowance method, other one is the direct write off method. In the allowance method, a bad provision account or liability account is created. This account consists of all the possible bad debt accounts that a seller expects non payment of the credit. In some companies a percentage is fixed for the total debtors of the company. So bad provision accounts are revised based on the criteria set by the companies. In direct write off method, a single entry is used to debit the amount from the bad debt expense account and crediting the amount to account receivables. The large firms usually follow the allowance method to know the credit losses immediately. But in case of small business, the write off method is followed, since the transactions are limited. The direct write off method benefits the small businesses, where credit losses can be shown at later time for tax purposes.
Accounts receivable has the advantage of projecting higher sales in the income statement. In the balance sheet, Account receivables are considered as current assets, since payments are considered due within a year. But when the amount is not paid it is debited as bad expenses from the income statement. The balance sheet shows a lesser amount of credit being paid by the debtors.