# Accounts Receivable – Randy Dong

When a seller sells its product or service to its customers, he isn’t always paid by cash straight up. Sometimes people pay by credit and that credit won’t be turned into cash until the buyer pays their credit. The amount of sales that aren’t yet turned into cash are called accounts receivable, and in today’s blog we will look at accounts receivable.

As I mentioned above, accounts receivable is actually credits waiting to be cashed out. And accounts are categorized by how long they have past their due dates. There are current accounts, credits that haven’t past their due dates. 1-60 days past due and 60-90 days past due are quite intuitive, it means that these accounts haven’t been paid even though they have past their due dates for a certain period of time. And then there’s over 90 days past due, which can include some very very old accounts receivable.

However, when a company writes its financial statements, it cannot directly report accounts receivable to its sales because sometimes people don’t pay for their credits. (Kind of like what the comic on top shows.)

A company can only report a good estimate of how much it can actually cash out from accounts receivable to its financial statements. And the way to make such an estimate is called aging analysis. Aging analysis is an empirical study, meaning that it does not predict by studying the credibility of each buyer but instead predicts by the companies previous record history.

As illustrated by the example above, a company gives out an estimate of uncollectible accounts in each account category. The company has 425,000 dollars accounts receivable in total, meaning 425,000 dollars worth of products or service were purchased from this company with credits. 250,000 dollars of the accounts are current accounts and according to history, they have the highest chance of payback, only 1% of the accounts are estimated to be uncollectible. It gives a 2,500 dollars estimated uncollectible sales. 100,000 dollars of the accounts have past their due dates for over a month but less than two months. These accounts have a slightly higher chance of default at 5%, which gives us an estimated 5,000 dollars worth of uncollectible accounts. 50,000 dollars of the accounts have past their due date between two months and three months. They have a 15% chance of default, which gives an estimated 7,500 dollars uncollectible accounts. Lastly, there are only 25,000 dollars of the accounts that have past their due date by 90 days and the default rate of these accounts skyrockets to 42%, giving us an estimated 10,500 dollars of uncollectible accounts.

As a result, for the company’s 425,000 dollars of accounts receivable, there is an estimated 25,000 dollars loss from uncollectible accounts. In other words, 400,000 dollars should be received. For the income statement, the company will report 425,000 dollars of accounts receivable but also report an estimated amount uncollectible of 25,000 dollars.

It is crucial for a company to reflect truthfully of its sales and accounts receivable is an important component.The aging analysis not only shows how much money the company expects to receive but also can tell people a lot about the company’s customers, which is also a very important piece of information in predicting this company’s future.

Citation:

P1: http://solidgrowthaccounting.com/10-accounts-receivable-best-practices__168.html

P2: http://www.principlesofaccounting.com/chapter7/chapter7.html

## One thought on “Accounts Receivable – Randy Dong”

1. margaretjhaviland

Very interesting summary of accounts receivable. Have you gotten a sense of what sorts of companies or businesses have higher defaults on money owed to them? How do companies compensate for this knowledge. What does this have to do with the whole credit default debacle from 2007-08?