Accounts Receivables (Meaning) | How to Generate Cash? - YouTube

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by clicking the bell ican Friends today we're going to learn a concept which is

known as account receivables account receivables is basically your debtors we

are gonna learn over here definition about the debtors is the accounting

examples on the same so let's get in the Nitty-gritty a Accounts Receivables is the money

that is owed to the company by the customers so credit to the customers now

we'll try and learn this in a much more detailed fashion the first and the

foremost thing in our kitty bag is the meaning part account receivable is the

money that is owed right to the company or to the company by the customer as

simple as that the company has provided service or delivered the product to the

customer but it has not collected the cash yet and that goes into cash in cash

equivalents so what are the second question what are the gross and net counts a

receivable my question is that what is the gross and net account receivable see

gross account receivables are the total receivable they are the total receivables

another total receivables that is the open invoice that are due to to the company

so this does not take into account a scenario where the customer may default

right and the net account receivables on the other hand takes into account the

probability of the default probability of default from the customers so to

prepare some non payments the company's estimates that the proportion of the

credit sales will go bad the term is usually called you know allowances for

doubtful debt okay so the estimate basically shows that shows upon the

income statement as known as the bad debt expense and this expense is usually

charged to the SG&A that is the selling general and

administrative expenses in the income statement no we'll try and learn this

with the help of an example now this is the Colgate Palmolive companies

consolidated balance sheet and an extract of assets has taken over here

the cash the receivables the inventories the other current assets and so on and

so forth so what we can see in 2014 the net

receivables is standing at 1552 million allowance and is 54 million

closely so this implies that the gross receivables the gross receivables is going

to be 1552 to write the receivable allowance and the net of allowance of 54

that you need to add our that which which will sum down to 1606 and in

2013 the net receivable is standing at 1636 million and allowance

is 67 million so this implies that the gross receivables are going to be

1636 +67 plus and it's a net of allowances basically you're

bad debt or bad debt receivable or that is a provision for doubtful debt and so on and

so forth now we will move on to the accounting part let's take one case

study and see how account receivable accounting works joins for you sales and

receipts for the customer I'm showing you over here all the customers they buy

over here on credit and I pay cash in the in the following year this is how is the

credit policy if they are not trying bankrupt so any uncollected receivables

are then written off that is what we know that what we call as the bad debts

right so based upon the experience toys for you books 10% of its debtors what we

call as receivables outstanding at the end of the period as allowance for

bad debt so this is the percentage for bad debt okay and this are the what we

call as the constraints or some of the details you

can say that so there are no other costs that is the cost of goods sold COGS is

zero and the actual write-off differs from the expectation and what you need

to do is you need to create the income statement balance sheet and the cash

flow at the end of year 1 & 2 so the accounts receivable at the year- 1

year 1 is going to be $100 that is the $100 sales

will be booked you do the accrual accounting concept okay and the COGS is

zero as given in the case study so the bad debt is 10% of the sales so

let's say $100 into 10% so that will give us 10 so the net income is

going to be 100 - 10 that's going to be 90 now the balance sheet

for the first year the balance sheet for the 1st year is going to be something

like this receivables is an asset so it will be reported at $100

after accounting for allowance for bad debts the net receivable will drop down

to 90 because 10 is the bad debt and in the income statement so income

statement will look something like this I'll just drop down over your income

statement it will have sales over here any bad debt that expenses so sales was one

100 - 10 so final net income will come down to 100 + better

expenses that is 10 right so this was the income statement disclosure if you

want to see the balance sheet side you know the balance sheet will also look

something like this there's this assets over here and let's say there's a

liability over here so the there'll be couple of Details like you know cash

which is zero as of now and we have accounts receivable that is the AR

standing at 100 and we have allowance for bad debt which

will be standing at minus 10 which will give us our final net receivable

standing at 100 - 10 so 90 and over here retained earnings will be taken from

your net income so this will balance now right I hope you have got a really clear

idea regarding how things have gone about now in the year second the same

thing will happen let's say the sales will be booked at accrual accounting

concept and the same thing is reported let's say 150 sales 10% as a part of the

bad debt so keep on applying the what we call the accounting effects on this and

you will you will get revised balance sheets for all three years now there are

a couple of your industries we should look at before we you know the account

receivables of banking company is 331 days machinery is 109 the construction

companies 107 and 103 you see metal chemicals glass

precision iron pulp and and so on and so for other expenses sort of examples of different

industries have been mentioned over here as you can see about the industries are

like banks have very long receivables period exceeding 300 of days

however for the capital good and the heavy heavy assets have industries like

machinery construction metals etc it is around 100 days so actually you can

consider that you know how far this numbers are moving around so in a final

concluding answer account receivable is the amount that is due to

the company by its customer and it is important to consider the default

probability of the customer and therefore look at the net receivable

number each industry has different set of trade policy and hence account

receivable days differs wide mission so that's it for this particular topic if

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