When a company lets customers buy on credit, the company attracts more customers. Allowing sales on credit is a part of doing business. However, it is not without risk! The result may be attracting some customers who will never pay the amount they owe to the business. When this money is not paid, the business has an uncollectible account which must be written off. If a business has too many uncollectible accounts, the business suffers and the end result can spell disaster! There are two methods of writing off uncollectible accounts: direct write-off and allowance methods. GAAP doesn’t recognize the direct write-off method because it doesn’t follow the matching principle. GAAP does recognize the allowance methods. There are several different allowance methods: percentage of sales percentage of accounts receivables, and aging of receivables method. The percentage of sales method can be referred to as the income statement method whereas the percentage of receivables method can be referred to the balance sheet method. The difference is how the Allowance for doubtful accounts is treated when using the two methods.
Accounts receivable are amounts due from customers for credit sales. For a company selling on credit, it is important to assess both the quality and liquidity of its accounts receivable. The quality of accounts receivable is how likely you are to collect these accounts without any loss. The speed of collection or how fast these accounts are paid or converted to cash, relates to the liquidity of collection. The accounts receivable turnover measures both the quality and liquidity of accounts receivable. In other words, it measures how likely collections are going to be and the speed of those collections.
Please respond to the following questions in your initial post:
Imagine you own a business. Describe your business. How would you manage the collection of receivables?
Even with careful planning, sometimes receivables still become uncollectible. Which method would you use to write off an uncollectible account? Explain your reasons.
What procedures would you put into place to encourage customers to pay their bills on time? Justify your decisions.
What does the accounts receivable turnover measure? How would you manage your accounts receivable turnover?
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