Accounts receivable is a concept used in accountingWhen a business sells its product on credit, the customer is invoiced and given a set time period to pay.The risk of the payment model is that the customer may default and the business will not be able to collect money.The portion of the balance that is expected to be collected is referred to as net accounts receivable.Net accounts receivable can be determined by subtracting the allowance for doubtful accounts, which estimates the portion of total accounts that will not be paid.
Step 1: The accounts receivable documents should be gathered.
Start with your business's current and historical accounts receivable records.These should detail the business's various customers and their order amounts, along with whether or not those customers have paid in the past.
Step 2: Determine which method to use.
Before the actual accounts are paid, the allowance for doubtful accounts is recorded.Unlike your power bill or the cost of printer paper, you won't know what your doubtful debt expense will be.All credit sales will be recorded in full at the end of the period, regardless of whether they have been paid or not.To record the credit sales that may not be paid for, you will have to estimate them using one of several accounting methods.Depending on the makeup of your customer base, using a percentage of total sales or individual risk analysis is the best way to estimate this expense.The estimation process for each method is explained in the following steps.
Step 3: A percentage of total sales is used.
For companies with a relatively large number of smaller accounts that only buy small amounts of product, the best option is to estimate the allowance as a percentage of sales.Determine a reasonable percentage of sales by looking at historical records.Look over your records to find out when your sales accounts went bad.It's a good idea to look over the past five years to see your total sales and the total value of your accounts.This debt accounted for the average percentage of total sales.You can divide the value of accounts by the total sales figure.You will get a percentage of the total sales that were not paid.The percentage is applied to the sales figure.The company will adjust the allowance for doubtful accounts to 3% of the total sales for the current accounting period if a certain amount of debts historically went delinquent.
Step 4: Risk analysis is used.
Use an individualized risk analysis for each customer if your company deals with a small number of clients.The categories need to be based on the historical risk of the accounts.Some clients are considered high-risk, while others are low risk.Each category is assigned a doubtful accounts percentage that reflects the likeliness of customers failing to pay their accounts.An estimated allowance for doubtful accounts can be arrived at by taking these percentages and dividing them by total sales.The method can be more artistic than scientific.You cannot assign a historical risk rate to a new customer.You can either use a historical percentage of sales for all accounts or use your own judgement of the customer.A customer that has historically let his purchases go unanswered may become more reliable with time.He might be able to raise his risk rating higher than a historical analysis would suggest.For a more specific example, imagine a customer that has historically paid his debts every single time, maybe only faltering once during hard times.Classify sales by this customer and others like them as "low-risk" and assign them a very low bad debt percentage.If you want to get the bad debt expense for low-risk accounts, you have to take total sales in these accounts.
Step 5: A combined analysis is used.
If your company has a large amount of clients, but also a few large clients that make up a disproportionate share of sales, consider combining the two methods.The risk analysis method should be used for larger clients and the percentage of sales method for smaller clients.Separating total sales for large and small clients is more accurate than using a historical sales percentage across the board.You have three clients that make up 60 percent of your sales.All of these clients pay for your products on time.Divide the bad debt allowance percentage by the total sales of these customers to get an estimate.Smaller customers only order a few products at a time and make up 40% of your business.To create a historical unpaid debt percentage for these customers, you would look at total debts and total sales to them.
Step 6: A receivables aging schedule can be created.
A more complex process uses historical data to determine the likelihood of payment based on how many days past due an invoice is.Decide on an average point at which late accounts become uncollectible and estimate your doubtful accounts by age.The accounts are either current (not due yet) or 90 plus days late.Figuring out bad debt percentages using this process is complicated and best left to accounting software, which can calculate this information accurately and quickly.
Step 7: The accounts receivable is divided by the number of accounts.
You need an asset account for this calculation.This value is calculated at the end of an accounting period.Current outstanding accounts that haven't been paid by customers are reflected in accounts receivable.Make a note of which risk level or risk category each account falls into in your calculation of the percentage allowance for doubtful accounts.This will allow you to calculate the percentage allowance for doubtful debts.
Step 8: The allowance should be calculated for doubtful accounts.
You can use the current value for accounts receivable to get your allowance for doubtful accounts.The monetary value of accounts that you expect will not be paid should be represented by this number.This should be done at the end of the accounting period.If you are using any form of risk categorization, remember to adjust the additional revenue doubtful account percentage based on which customer or risk category it is coming from.You need to be able to divide the revenue by the risk percentage of each customer category.It is possible to separate the current value for accounts receivable into categories or individual accounts.Simply divide each account or category by the allowance for doubtful accounts percentage and then add it together.The allowance for doubtful accounts will be given a total value.Imagine that your accounts receivable is $100,000.$30,000 come from high risk customers, $20,000 from medium risk, and $50,000 from low risk with allowance for doubtful debt percentages of 2%, 1% and 5%, respectively.Your total allowance for doubtful debts would be between $30,000 and2,400.
Step 9: Subtract the allowance from the accounts receivable.
You will get your value for net realizable receivables.You expect to collect this amount of receivables.You would subtract the allowance for doubtful accounts of $2,400 from the total accounts receivable of $100,000 to get your net accounts receivables, which is $97,600.The matching principle requires that allowance be recorded for doubtful debts.Even if this customer pays in full, record the expense to match its revenue.The "subtraction" is an addition of accounts receivable, current asset account, and allowance for doubtful accounts.The asset account is reduced when added because it is a negative value.Unless you are a publicly-held company, there is no need to follow this organization.The subtraction is important.
Step 10: Find the percentage of net accounts receivable.
Net accounts receivable can be expressed as a percentage.The percentage allowance for doubtful accounts is subtracted from the total.The percentage is the chance that a company can collect money from its customers.This can be used to measure the health of the company.The net accounts receivable expressed as a percentage would be 100% if the forecasted percentage allowance was 3%.98% of customers will pay for the company's services or products.For different risk levels, you would have to take a weighted average of the percentage allowance for doubtful accounts and use that as your overall percentage.To find net accounts receivable, you would subtract this percentage from 100%.You can calculate the weighted average for more.