Accounts Receivables

Accounts receivables are amounts owed to the company by debtors. This is the reason why we also use the term sundry debtors to denote the amounts owed to the firm. This represents amounts usually arising out of normal commercial transactions. In other words, ‘accounts receivable’ or sundry debtors represents unpaid customer accounts. These are also known as trade receivables, since they arise out of normal trading transactions. Trade receivables arise directly from credit sales and as such provide an important information for management and outsiders. In most situations these accounts are unsecured and have only the personal security of the customer.

It is normal that some of these accounts default and become uncollectible. These collection losses are called bad debts. It is not possible for the management to know exactly which accounts and what amount will not collected. However, based on past experience, it is possible for the management to estimate the loss on the receivables or sundry debtors as a whole. Such estimates reduce the gross value of account receivable to their estimated realizable value. For example:

The estimated collection loss is variously referred to reserve for doubtful debts, reserve for bad debts or reserve for collection losses. It is also not an uncommon practice to refer to this as a provision instead of reserve.

It is a usual practice for debts to be evidenced by formal written promises to pay or acceptance of an order to pay. These formal documentary debts represent Promissory Notes Receivable or Bills Receivable. These instruments used in trade are negotiable instruments and hence enable the trader to assign any of his receivables to another party or a bank for realizing immediate liquidity.

It is also usual for account receivables to be pledged or assigned mostly to banks against short-term credits in the form of cash credits or overdrafts.