As part of doing business, companies often have to deal with operations related to the occurrence of receivables. The presence of a large number of nuances and subtleties, due to the features of the recognition of this small trouble and its reflection in the documents, can often cause questions among accountants and reporting users. However, this problem will not present great difficulties if we consider in detail all the features associated with the recognition and recognition of debt in accounting. These aspects are the subject of this article.
What is receivables and when does it arise?
In the process of business activities, companies often have to interact with customers who purchase its goods and services, and suppliers that provide materials and components for a fee. DZ (receivables) arises in the course of this interaction in the following cases:
- The company transferred goods to customers, but so far has not received revenue for these goods. It is assumed that the customer will pay for the goods later.
- The company paid for the materials, but so far has not received them. It is assumed that the supplier will deliver the materials later.
That is, it can be said that if a company has a DZ, then there are economic entities that owe it something. Accounts receivable are important not to be confused with accounts payable. The presence of the latter company means that there are economic entities that this company owes. Moreover, the receivables of one company are often payable to another.
The impact of receivables on doing business
The issue of the impact of the availability of receivables on business is controversial. On the one hand, it allows you to significantly expand business opportunities. The entities with which the company interacts do not always have enough funds to fully pay for goods and services. Then DZ is one of the few means that make interaction possible.
However, it must be remembered that accounts receivable are the value of goods that they sold but did not pay, or materials that they bought but did not receive for use. Accordingly, it always causes the diversion of funds from circulation, their temporary necrosis. Therefore, if the volume of receivables is too large, this does not contribute to the development of the business, but rather, on the contrary, prevents its expansion. In addition, there is always a risk that the debt will not be repaid, which inevitably leads to financial losses and may even lead to bankruptcy of the company. For this reason, the allowable amount of debt must be approached very carefully, carefully weighing all the risks and possible benefits.
Accounts receivable in company reporting
The amount of receivables can be found by considering the balance sheet of the company. It is located in the current assets of the balance sheet. This category is presented without a reserve for doubtful debts, that is, without additional funds that theoretically the company may not recover from debtors.
Selling company debts and company liquidity
Elements of the second section of the balance sheet are arranged in order of increasing degree of their liquidity. This concept refers to its ability to transform into money in a relatively short time. The most illiquid part of the balance sheet is stocks, since selling them is the most difficult task. The sale of remote sensing is also a difficult, but feasible task. The probability of a successful sale of a debt depends on its conditions: the term, the reliability of the debtor, and so on. There are frequent cases of sales of remote sensing at a lower price, due to the lack of demand or tight sales periods.
Doubtful debts
Doubtful accounts receivable is the amount the company may never have to return. In order for it to be recognized as doubtful, it must meet the following conditions:
- Debt arose in the process of operating activities, that is, that which is the direct purpose of the existence of the company.
- Debt is not repaid within the period specified in the contract. If there is no term in it, then to determine it, you need to refer to the laws, regulatory legal acts and other official sources of law.
- There should be no pledge or surety regarding the debt, since otherwise it can be requested from another person who is the guarantor, or obtained by selling the subject of the pledge.
It is important to remember that DZ is doubtful if it meets all three of these conditions. Accounting for doubtful receivables is characterized by the presence of some features that distinguish it from simple accounting.
The presence of such a problem does not mean at all that the funds have been lost forever. Doubtful receivables are amounts that are still collectable. True, this happens extremely rarely, but if you act quickly and within the framework of the law, then everything can turn out in a very safe way. Write-off of receivables for doubtful debts occurs if it is fully repaid.
Bad accounts receivable
Accounts receivable for doubtful debts should not be confused with bad debts. The latter is almost impossible to return. To recognize a debt as bad, any of these conditions must be met:
- The company cannot go to court to claim the amount from the debtor for reasons related to the law.
- The debtor company is being liquidated. In this case, there is no economic entity that could repay the debt, so its collection cannot be implemented in any way.
Both of these conditions are equivalent, and at least one of the conditions is sufficient to recognize a debt as bad.
Doubtful receivables in the balance sheet
Consider some accounting features of this phenomenon. The share of doubtful receivables affects its total amount. So, if the company failed to recognize the fact of doubtfulness, then all debt is recorded as receivables. If everything fully complies with the conditions specified earlier in the article, then the liability for doubtful debts of receivables is calculated for liabilities. This reserve reduces the total amount presented in section No. 2 of the company's balance sheet.
Write-off of doubtful accounts receivable occurs at the expense of the amount of the reserve, if, of course, it was created as part of the accounting policy. If the liability is greater than the amount of the reserve, the difference is written off to the expenses of the company, reduces the amount of income tax and, therefore, increases the amount of net profit.
Why do you need a reserve for bad debts?
This reserve is necessary if there is good reason to believe that the debt will not be repaid on time. Doubtful accounts receivable is a factor that can harm the financial well-being of the company, and in order to reduce its impact on the business, the above reserve exists.
The scheme of work is as follows: first, the company must indicate in the accounting policy the fact of creating a reserve. Based on the accounting for doubtful accounts receivable, an entity calculates a provision. Then it is deducted from profit, thereby reducing the amount of tax payments and increasing the amount of net income.
Creation Features
How to create a reserve for bad debts of receivables? Its value depends on how long the debt is due. The establishment of these terms is a fairly reasonable decision of the state, since doubtful receivables are debt that have not been returned on time, and, of course, the likelihood that the liability will be returned, the delay for which is 10-15 days, is much higher than if this time was six months or a year. Accordingly, due to differences in the probability of debt repayment, there is a difference in the amount of recognized reserves.
So, if the counterparty does not return the debt within a period of one to 45 days, this receivable cannot be recognized as doubtful, since this period is too short. Doing business is not always predictable, perhaps the counterparty does not repay the debt due to an unforeseen cash gap, therefore, for this reason, these types of debts are not recognized as doubtful, do not increase the size of the reserve and do not reduce the amount of income tax paid
If the debt period is from 45 to 90 days, then it is recognized in the amount of 50% of the total amount, increasing the amount of the reserve by this amount.
Accounts receivable, the period of which is more than 90 days, are recognized in full.
Debt inventory process and its significance
The definition of the above dates occurs in the process of inventory of doubtful receivables. After this operation, the reserve is adjusted as follows:
- If the counterparty returns the debt, which was previously considered doubtful, the liability is restored, respectively, the amount of the reserve is reduced by this amount. In addition, the company will be required to pay income tax, the basis of which is the amount of debt received.
- If the counterparty does not return the debt, then its value is completely written off due to the reserve. If it is formed, then the company does not have the right to write off debt from other funds.
Receivables management
Reserve formation is a frequently used, but by no means the only instrument for managing receivables. The main objective of this process is to reduce the terms of debt repayment and to reduce the likelihood of losses due to dishonesty of counterparties. However, there are other ways to achieve this goal.
So, if DZ needs to be transformed into cash, it can be sold. True, in this case there is a probability of losses.
In addition, it is possible to provide preferential terms of interaction for suppliers and customers paying off with the company immediately, or as soon as possible. Such conditions may include discounts, reduction in fees and so on.
In addition, at the moment it is possible to verify the integrity of debtors using special services, which can also significantly reduce the likelihood of economic losses. There are special counterparty reliability factors based on a survey of its suppliers.
DZ is a unique tool that allows companies to carry out intercompany interaction, as well as cooperation with customers, even if the counterparties do not have sufficient funds to carry out various business operations.