Lecture: Receivables and Payables
Instructor
- William Terando
- Date: May 10, 2018
Key Concepts
Receivables
- Definition: Amounts due to a company from customers or other entities.
- Types:
- Accounts Receivable: Short-term amounts due from customers as a result of sales.
- Notes Receivable: Written promises for amounts to be received, often with interest.
- Accounting for Receivables:
- Record at the time of sale or service.
- Importance of estimating uncollectible accounts (bad debts).
- Allowance Method vs. Direct Write-Off Method.
Payables
- Definition: Amounts a company owes to suppliers or other entities.
- Types:
- Accounts Payable: Obligations to pay for goods or services acquired.
- Notes Payable: Written promises to pay a certain amount of money.
- Accounting for Payables:
- Recognize upon the receipt of goods or services.
- Impact on cash flow management.
Important Details
Allowance Method
- Purpose: Estimate bad debts to match them against revenues in the same period.
- Process:
- Create an allowance for doubtful accounts.
- Adjust the allowance account as needed based on historical data and judgment.
Direct Write-Off Method
- Purpose: Recognize bad debts expense only when specific accounts are deemed uncollectible.
- Downside: Does not match expense with associated revenue appropriately.
Impact on Financial Statements
- Receivables and Payables impact:
- Balance Sheet: Reflects the amounts owed by and to the company.
- Income Statement: Bad debts and interest impact net income.
- Cash Flow Statement: Timing of cash inflows and outflows related to receivables and payables.
Best Practices
- Regularly review and adjust the allowance for doubtful accounts.
- Maintain accurate records of all receivable and payable transactions.
- Monitor cash flow to ensure sufficient liquidity for obligations.
By understanding these concepts, companies can better manage their financial health, ensuring they have enough incoming cash to meet their obligations and accurately reflect their financial position in reports.