Scribd Logo
Upload

Welcome to Scribd!

  • 57 views

    Assignment of Financial Management

    Uploaded by

    Navneet Kaur
    Accounts receivable refers to money owed to a company by customers who have purchased goods or services on credit but not yet paid for them. It represents a short-term loan to customers and is recorded as a current asset on the balance sheet. Companies establish controls over accounts receivable to ensure amounts owed are collected in a timely manner and to prevent errors and fraud such as issuing improper credit memos. Key controls include segregating billing and credit memo functions, proofreading invoices, and auditing cash receipts and shipping documents.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Assignment of Financial Management

    Uploaded by

    Navneet Kaur
    57 views6 pages
    Accounts receivable refers to money owed to a company by customers who have purchased goods or services on credit but not yet paid for them. It represents a short-term loan to customers and is recorded as a current asset on the balance sheet. Companies establish controls over accounts receivable to ensure amounts owed are collected in a timely manner and to prevent errors and fraud such as issuing improper credit memos. Key controls include segregating billing and credit memo functions, proofreading invoices, and auditing cash receipts and shipping documents.

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Accounts receivable refers to money owed to a company by customers who have purchased goods or services on credit but not yet paid for them. It represents a short-term loan to customers and is recorded as a current asset on the balance sheet. Companies establish controls over accounts receivable to ensure amounts owed are collected in a timely manner and to prevent errors and fraud such as issuing improper credit memos. Key controls include segregating billing and credit memo functions, proofreading invoices, and auditing cash receipts and shipping documents.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    57 views6 pages

    Assignment of Financial Management

    Uploaded by

    Navneet Kaur
    Accounts receivable refers to money owed to a company by customers who have purchased goods or services on credit but not yet paid for them. It represents a short-term loan to customers and is recorded as a current asset on the balance sheet. Companies establish controls over accounts receivable to ensure amounts owed are collected in a timely manner and to prevent errors and fraud such as issuing improper credit memos. Key controls include segregating billing and credit memo functions, proofreading invoices, and auditing cash receipts and shipping documents.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 6

    Assignments of

    Financial management

    Mohammad Alem
    Qazizada
    Roll No:23052
    What Is Accounts Receivable (AR)?

    Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered
    or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as
    a current asset. AR is any amount of money owed by customers for purchases made on credit.

     Accounts receivable is an asset account on the balance sheet that represents money due to
    a company in the short-term.
     Accounts receivables are created when a company lets a buyer purchase their goods or
    services on credit.
     Accounts payable is similar to accounts receivable, but instead of money to be received,
    its money owed. 
     The strength of a company’s AR can be analyzed with the accounts receivable turnover
    ratio or days sales outstanding. 
     A turnover ratio analysis can be completed to have an expectation of when the AR will
    actually be received.

    Understanding Accounts Receivable


    Accounts receivable refers to the outstanding invoices a company has or the money clients owe
    the company. The phrase refers to accounts a business has the right to receive because it has
    delivered a product or service. Accounts receivable, or receivables represent a line of credit
    extended by a company and normally have terms that require payments due within a relatively
    short time period. It typically ranges from a few days to a fiscal or calendar year.

    Companies record accounts receivable as assets on their balance sheets since there is a legal
    obligation for the customer to pay the debt. Furthermore, accounts receivable are current assets,
    meaning the account balance is due from the debtor in one year or less. If a company has
    receivables, this means it has made a sale on credit but has yet to collect the money from the
    purchaser.

    Many businesses use accounts receivable aging schedules to keep taps on the status and well-
    being of AR accounts.

    Payment terms:

    An example of a common payment term is Net 30 days, which means that payment is due at the
    end of 30 days from the date of invoice. The debtor is free to pay before the due date; businesses
    can offer a discount for early payment. Other common payment terms include Net 45, Net 60 and
    30 days end of month. The creditor may be able to charge late fees or interest if the amount is not
    paid by the due date. In practice, the terms are often shown as two fractions, with the discount
    and the discount period comprising the first fraction and the letter 'n' and the payment due period
    comprising the second fraction. For instance, if a company makes a purchase and will receive a
    2% discount for paying within 10 days, while the whole payment is due within 30 days, the
    terms would be shown as 2/10, n/30. Booking a receivable is accomplished by a simple
    accounting transaction; however, the process of maintaining and collecting payments on the
    accounts receivable subsidiary account balances can be a full-time proposition. Depending on the
    industry in practice, accounts receivable payments can be received up to 10 – 15 days after the
    due date has been reached. These types of payment practices are sometimes developed by
    industry standards, corporate policy, or because of the financial condition of the client.
    Bookkeeping

    On a company's balance sheet, accounts receivable are the money owed to that company by
    entities outside of the company. Account receivables are classified as current assets assuming
    that they are due within one calendar year or fiscal year. To record a journal entry for a sale on
    account, one must debit a receivable and credit a revenue account. When the customer pays off
    their accounts, one debits cash and credits the receivable in the journal entry. The ending balance
    on the trial balance sheet for accounts receivable is usually a debit.

    Business organizations which have become too large to perform such tasks by hand (or small
    ones that could but prefer not to do them by hand) will generally use accounting software on a
    computer to perform this task.

    Companies have two methods available to them for measuring the net value of accounts
    receivable, which is generally computed by subtracting the balance of an allowance account from
    the accounts receivable account.

    The first method is the allowance method, which establishes a contra-asset account, allowance
    for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for
    accounts receivable. The amount of the bad debt provision can be computed in two ways, either
    (1) by reviewing each individual debt and deciding whether it is doubtful (a specific provision);
    or (2) by providing for a fixed percentage (e.g. 2%) of total debtors (a general provision). The
    change in the bad debt provision from year to year is posted to the bad debt expense account in
    the income statement.

    Control of account receivable

    The allowance method can be calculated using either the income statement method, which is
    based upon a percentage of net credit sales; the balance sheet approach, which is based upon an
    aging schedule in which debts of a certain age are classified by risk, or a combination of both

    Controls over accounts receivable really begin with the initial creation of a customer
    invoice, since you must minimize several issues during the creation of accounts receivable
    before you can have a comprehensive set of controls over this key asset. Controls then span
    the proper maintenance of accounts receivable, and their elimination through either
    payments from customers or the generation of credit memos. The key controls to consider
    are:

     Require credit approval prior to shipment. You will have problems collecting
    accounts receivable if an order is shipped to a customer with a bad credit rating. Therefore,
    require the signed approval of the credit department on all sales orders over a certain dollar
    amount.

     Verify contract terms. If there are unusual payment terms, verify them before
    creating an invoice. Otherwise, accounts receivable will contain invoices that customers
    refuse to pay.

     Proofread invoices. If an invoice for a large-dollar amount contains an error, the


    customer may hold up payment until you send a revised invoice. Consider requiring the
    proofreading of larger invoices to mitigate this problem.

     Authorize credit memos. People who have access to incoming customer payments
    could intercept incoming cash and then create a credit memo to cover their tracks. One step
    in the prevention of this problem is to require the formal approval of a manager for credit
    memos, which are then verified at a later date by the internal audit staff. Do not take this
    control to extremes and require approval for extremely small credit memos - allow the
    accounting staff to create small ones without approval, just to clean up small remaining
    account balances.

     Restrict access to the billing software. As just noted, someone could intercept
    incoming payments from customers and hide the theft with a credit memo. You should
    password-protect access to the billing software to prevent the illicit generation of credit
    memos.

     Segregate duties. As just noted, no one should be able to handle incoming customer
    payments and create credit memos, or else they will be able to take the money and cover
    their tracks with credit memos. Therefore, assign these tasks to different people.

     Review accounts receivable journal entries. Accounts receivable transactions almost


    always go through a sales journal in the accounting software that generates its own
    accounting entries. Therefore, there should almost never be a manual journal entry in the
    accounts receivable account. You should investigate these entries carefully.
     Audit invoice packets. After invoices are completed, there should be a packet on file
    that contains the sales order, credit authorization, bill of lading, and an invoice copy. The
    internal audit staff should review a selection of these packets to verify that the billing clerk
    properly reviewed all of the supporting paperwork and correctly generated an invoice.

     Match billings to shipping log. It is possible that items will be shipped without a
    corresponding invoice, or vice versa. To detect these situations, have the internal audit staff
    compare billings to the shipping log, and investigate any differences.

     Audit the application of cash receipts. The accounting staff may incorrectly apply
    cash receipts to open invoices, perhaps not even applying them to the accounts of the correct
    customers. Have the internal audit staff periodically trace a selection of cash receipts to
    customer invoices to verify proper cash application.

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy