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Accounting for Accounts Receivable and related financial management

本文发表在 rolia.net 枫下论坛There are two ways to account for AR: Gross Method and Net Method.

1.The net method recordds AR net of any applicable sales discount. If the payment is not recieved during the discount period, sales discounts forfeited is credited at the the end of the discount period or when the payment is received.
2.The gross method accounts for receivables at their face amount. If a discount is taken, a sales dicount is recorded and classified as an offset to sales in the income statement to yield net sales.

How to account for Bad Debt Expense

1. Use "Allowance Method": Record percentage of sales by crediting an AR contra account. As AR are written off, they are debited to the allowance. Such write off has no effect on working capital or total assets.
2. A common method of estimating the loss is an analysis of AR known as AR Aging Schedule. Stratefying the AR according to the time they have been outstanding permits the use of different percentages for each category. This results in a more accurate estimate of recoverable amount than if a single rate is used.

How to reduce AR collection risk?
1. Pledge AR as collateral for a loan. Use collection to repay a loan. This is informal arrangement and note disclosure should be made to financial statement.
2. Assign AR, use AR as security. As assinor/borrower, you sign a promissory note and financing agreement to specify AR serve as collateral. The assignee reduces risks by accepting only accounts that are highly collectible. Thus assinged AR should be segregated from other asset accounts in F/S and a liablity should be recognized.
3. Factor AR, discount AR on a nonrecourse, notification basis. Sell AR outright to a transferee (the factor) that assumes the full risk of AR collection, even in the event of a loss. You as transforor, receives money that can be immediately reinveted into inventories. Your factor receives a high financing fee plus a fee for performing the collection.

Cash deposit and disbursement
1. Know the procedures including depositing and reconciling cash receipts. To expedite receipts, lockbox system, wire transfer, electronic funds transfer can be used.
2. Know the pocedures in cash disbursement too. To slow disbursement, use vendor/supplier's credit terms to maximum to save financing costs.
3. Use well the "float" arising from delay between an expenditure or receipts by check and the clearing of a check. This is effectively an interest-free loan to the payor.

Maintain Optimal AR Outstanding and Optimal Bad Debts
1. There is a trade off between the benefits of credit sales and the cost of AR collection, interest and bad debt costs. A good AR policy does not seek merely to maximize sales or to minimize default risk.
2. Use credit scoring to determine whether to extend trade credit to your customer.
3. The ultimate objective is to maximize the AR turnover ratio. (= Net Credit Sales / Average AR). The number of days in receivable (= 365/ AR turnover ratio) can be compared with seller's credit terms to determine whether most customers are paying on time. Assess the collection period (avg number of days to collect AR) periodically.
4. Also determine the "average gross receivalbe" (= avg daily sales x average collection period).

Other
1. Know liquidity ratios such as current ratio, quick ratio, working capital
2. Know "operating cycle", "cash conversion cycle" and what do they mean to a financial manager.

My final advice: use simple numerical examples when you decribe these AR issues. It will make the interviewer understands, much much better!更多精彩文章及讨论,请光临枫下论坛 rolia.net
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Replies, comments and Discussions:

  • Accounting for Accounts Receivable and related financial management Accounting for Accounts Receivable and related financial management
    • Thanks early bird! :)
    • I always save your posting for future reference. Thank you for sharing :)
    • Love your posts and always save it for further reference. Thanks. I had never thought AR would have so much in depth knowledge, since the text book only cover a little piece of it. If for an unexperienced AR, what would you suggest her to focus on first?
      • Start with a clear description of an AR/Invoicing process, see link.