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Questions and Answers
Which of the following is NOT a strategy for effective management of accounts receivable?
When should a company recognize bad debts expense on their income statement?
What is the primary benefit of factoring accounts receivable for a small business?
Which of the following is not a common strategy for the systematic reduction of accounts receivable balances?
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Which of the following is a key benefit of efficient cash flow forecasting for accounts receivable management?
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Which of the following is NOT a commonly used method for tracking the aging of accounts receivable?
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Which of the following is not a common strategy for managing accounts receivable?
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What is the main purpose of the accounts receivable process?
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Which of the following is a disadvantage of the dated method for tracking the aging of accounts receivable?
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Which of the following is NOT a typical term specified in an invoice?
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What is the primary benefit of factoring accounts receivable?
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Which of the following is the BEST way to manage the accounts receivable process?
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Study Notes
Accounts Receivables
Accounts receivables (A/R) are unpaid invoices issued by a business, usually from services rendered or goods sold. They represent the amount owed by customers who have purchased products or services from the business. A/R is an essential part of any revenue cycle management strategy because it represents money that has been earned but not yet received. This section will discuss various aspects of managing accounts receivables:
Accounts Receivable Process
The account receivable process begins when a company extends credit to its customer and issues an invoice. The invoice specifies the terms of payment, such as due dates, discounts for prompt payments, and late fees for missed deadlines. If the invoice amounts aren't paid within the specified timeframe, companies may start reaching out to their customers to request payment.
Aging of Accounts Receivable
Aging of accounts receivable refers to the period between issuing an invoice and receiving payment. This process helps businesses track how old each outstanding invoice is, indicating when they should follow up with customers to collect overdue payments. Commonly used methods for this task include:
- Dated method: Here, each balance is adjusted only on the last day of the month.
- Weighted average daily balance: In this case, balances are adjusted continually based on the individual invoice amounts.
- Systematic method: Each balance is reduced at regular intervals until the total is zero, which can result in more accurate cash flow projections.
Factoring of Accounts Receivable
Factoring involves selling your accounts receivables to another party known as a factor at a discount. When you sell your accounts receivables to a factor, you receive immediate cash while the factor assumes responsibility for collecting the debt from your customers. This arrangement is useful for small businesses that need working capital quickly without having to wait for customers to pay their bills.
Management of Accounts Receivable
Effective management of accounts receivable requires strategies like proper documentation, efficient cash flow forecasting, and clear communication with customers regarding payment terms and schedules. Additionally, creating a system for keeping records updated, setting realistic expectations for collection times, and monitoring overall collections performance can help optimize your A/R processes.
Bad Debts Expense
Bad debts expense occurs when a company is unable to recover debts due to a customer's insolvency or when a payment is deemed uncollectible. Under the revenue recognition rule, bad debts expense should be recognized in the income statement when it is deemed uncollectible, either in the period when the sale is made or the period when the portion of the sale is made that can be estimated to be uncollectible.
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Description
Learn about the accounts receivables (A/R) process, aging of accounts receivable, factoring of accounts receivable, management techniques, and bad debts expense. Understand the importance of managing A/R efficiently in revenue cycle management for businesses.
