![]() ![]() ![]() That is, they can be more easily sold or transferred to others. Notes may be more easily converted into cash because quite often they are negotiable instruments. The terms or amounts of the debt cannot be changed without substituting another document.Ī due date is usually established for notes, and they bear interest from the day on which they are signed.īoth notes and accounts receivable are legally enforceable. Notes receivable are evidenced by a signed document.They typically bear interest only after a set amount of time has passed. ![]() They are known as open accounts if the customer is free to add to them. Accounts receivable can generally be increased (up to a specified level) whenever the debtor wants and are not necessarily paid in accordance with a rigid schedule.Ĭharge accounts for customers are prime examples of accounts receivable.Most of them, however, can be classified as either accounts or notes. Controls are also created to assure that the balances of the receivables are correctly stated and that debtors are correctly billed. Management tries to reduce the risk by controlling the procedures for granting credit. The risk can be tolerated if it produces income through finance charges or through increased sales. This risk can be reduced by a collateral agreement with the debtor. Impact of Accounts Receivable on CompaniesĬompared to cash, there is more risk associated with receivables because of the possibility of not collecting the total amount due. Other types of transactions may create receivables, such as payments of advances and deposits, or filing for tax refunds. Receivables occasionally arise from lending cash to others, but these transactions are unusual for most businesses that are not financial institutions. These items are collectively labeled as trade receivables. The primary sources of receivables are transactions with customers in which they are allowed to pay later. Generally, only existing legal rights are disclosed in the body of the balance sheet.Ĭontingent (or potential) rights to collect may be disclosed in footnotes if they are material and if sufficient information is provided to allow the reader to understand the contingency.įor example, if the management believes that it will win a lawsuit that it filed against another company, a receivable cannot be recorded until management has signed a settlement or the court has entered judgment in its favor. The function of a company's credit department is to establish and enforce credit policies.Ĭredit policies should protect the firm against excessive bad debts but should not be so restrictive as to eliminate customers who, despite not having a perfect credit rating, are likely to pay.Īccountants disclose receivables when the reporting company has the right to receive cash, some other asset, or services from another party. For many retail firms, accounts receivable represents a substantial portion of their current assets. Accounts receivable arise from credit sales. ![]()
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