Valuation Accounts Receivable

Valuation of Accounts Receivable

Accounts Receivable : are amounts that customers own the company for normal purchase .

Since account receivable are generally collected with in two months of the sale , they are considered a current asset and usually appear on balance sheet below short term invested and above inventory ,

But sometimes is difficult determine the amount to report because some receivable will become uncollectible .

• These uncollectible accounts are also called bad debts .
• Many companies attempt to increase profits by selling on credit .
  • Losses from bad debts almost always accompany credit sales
• The benefits derived from increased sales must be compared to the bad debts losses resulting from those sales.

Most companies establish a credit policy

A credit policy : reflects the degree of risk a company is willing to accept in order to increase sales,

Credit policies are closely associated with customers,

Credit ratings that is , high credit ratings indicate low risk , whereas low credit ratings indicate high risk,

Once a particular credit policy is adopted, a company may record bad debts by either of two procedure :

1. Bad debts are recorded as the actual losses is determined .
1. Bad debts are recorded in the year of sale based upon an estimate of the amount of uncollectible accounts