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Accounts Receivables, Video 1, What are Accounts Receivable? - YouTube
Channel: Else Grech Accounting
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hi else here and today we'll start our
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discussion about accounts receivable
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what our accounts receivable to
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understand that let's step back for a
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minute and look at previous videos when
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we sell goods or services we sometimes
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sell them in exchange for cash this is a
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transaction and in order to analyze any
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transaction we have to ask ourselves the
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critical questions those are what did we
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get and what did we give away if there's
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still confusion we can ask ourselves the
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enhancing questions that help us clarify
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our thinking what did we earn what did
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we use or consume and what do we owe for
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this transaction we have to ask
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ourselves what did we get we got cash
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that's an asset because it has future
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economic benefit what did we give away
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we gave away a good or service and that
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means we earned revenue what would the
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impact of this entry look like on the
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accounting equation there would be an
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increase in assets cash and an increase
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in equity through revenues this is an
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external transaction because it's in
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exchange between two parties one of whom
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is outside of the company but what
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happens if we sell to a customer on
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account or for credit both of these
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things mean that we have allowed the
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customer to receive a good or service
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now and to pay us later when we sell to
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a customer on account
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we'll give them a good or service with a
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bill or invoice we still have to record
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revenue because we provided the service
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or delivered the good so equity will be
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increased we also have to record an
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asset because we have the future right
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to collect cash from our customers and
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that's an asset called accounts
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receivable
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where is accounts receivable on the
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financial statements let's quickly look
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at the balance sheet you can see that
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accounts receivable are current assets
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because we generally collect the cash
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within one year or operating cycle
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whichever is longer
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remember that assets are listed in order
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of liquidity how fast they'll be
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converted into cash or used or consumed
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to help generate revenue accounts
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receivable is listed under cash and
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short-term investments because they're
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less liquid taking longer to convert
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into cash accounts receivable is listed
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above inventory prepaids
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and supplies that's because they don't
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take as long to convert into cash before
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we work on some examples
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explore why a company would want to sell
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on account or for credit well I'll give
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you an example that applies to me down
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the street from my office there's a
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little fast-food place that makes
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excellent vegetarian food there's not
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that many places that serve good
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vegetarian lunches so I like to go there
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but I never carry cash and this place
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only accepts cash because of that I
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almost never go there instead I go to a
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competitor of theirs right near them
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that does accept cash or credit
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that's exactly why companies sell on
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account they know that if they don't one
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of their competitors will and they lose
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customers in order to remain competitive
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with their competitors they have to sell
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on account now why do companies want to
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buy on credit well that's because they
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can get the product or service without
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paying any cash today
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yes they still owe cash in the future a
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company who buys on credit records an
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Accounts Payable a liability that they
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have to pay in cash in the future but
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they benefit because they get the
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product or the service now maybe 30 or
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45 days before they have to pay the cash
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they get a double benefit they can delay
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their cash payments while still getting
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the product or service now that's a
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pretty sweet deal
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looks like selling for credit benefits
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the customer because they can delay
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payment but get the product or service
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now not so much the seller yes the
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seller remains competitive but they
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don't get their cash right away which
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has a cost attached to it we'll get a
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better understanding of the full cost of
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selling on credit by the end of this
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video let's do a few examples to see how
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accounts receivable called a are for
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short are recorded on August 28 2014 ABC
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company sells $1200 of services to a
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customer on account providing them with
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30 days to pay the invoice on October
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2nd ABC company calls the customer to
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advise them that they have not as yet
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paid their invoice and it's past due on
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October 18th the company pays what is
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the entry on October 28th what did we
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give away we gave away a service so we
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record an increase to revenues what did
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we get we got a promise from the
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customer to pay in the future which is
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an asset account called accounts
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receivable the entry on August 20
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is an increase in assets of $1,200 and
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an increase in equity of $1,200 which is
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a transactional entry what is the entry
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on October 2nd when we call the customer
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nothing because there's been no
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exchanges yet we didn't get anything and
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we didn't give anything away so no entry
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what is the entry on October 18th when
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the customer pays again analyze using
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the critical questions what did we get
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and what did we give away we got cash
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so asset the account cash increases what
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did we give away we gave back the
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customers IOU so we have to reduce the
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accounts receivable account by the
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amount the customer paid the end result
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accounts receivable for that customer
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will be zero because they don't owe us
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anything anymore what if we sold a
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product instead of a service how would
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that change our entries say this time
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ABC company who uses the perpetual
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inventory system sold $2,500 of goods on
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credit for the selling price of six
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thousand dollars they did this on
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November 1st 2014 on credit or for
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credit means the same thing as on
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account and we can use either term for
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this sale our terms are net 15 which
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means the customer has to pay the whole
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amount within 15 days on November 28th
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after two phone calls to our customer
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they pay us four thousand dollars on
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account the remaining $2,000 is paid on
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December 18th
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what entry must be made on November 1st
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what did we get and what did we give
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away well we gave away a good so we have
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earned sales sales increases which
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increases income retained earnings and
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equity what did we get we got the legal
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right to collect cash from our customer
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in the future and accounts receivable
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what is our entry assets increase
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accounts receivable and equity increases
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through sales both by six thousand
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dollars have we forgotten something we
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know from our videos on merchandising
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companies that a sale of a product under
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the perpetual inventory system requires
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two entries a sales entry to the sales
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account at the selling price and a cost
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entry to the cost of goods sold at the
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cost of inventory
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remember that cost of goods sold account
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is
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also called cost of sales our entry has
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to recognize that inventory has been
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sent to the customer so we have to
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remove it from our inventory account
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under the element assets in addition the
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cost of earning that six thousand
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dollars of revenue is two thousand five
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hundred dollars the cost of our
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inventory we used inventory to generate
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revenue and the word used tells us that
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we have to record an expense so our cost
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entry is a decrease to the inventory
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account of two thousand five hundred
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dollars and a decreased equity through
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the cost of goods sold account which is
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one of the few expense accounts that
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does not include the word expense so
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what is the entry on November 28th when
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the customer pays us four thousand
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dollars on account when a customer pays
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on account it means that they did not
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pay the total amount of their invoice
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instead they made a partial payment we
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have to analyze the transaction using
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our critical questions what did we get
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and what did we give away we got cash so
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assets increase what did we give away we
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gave back only a portion of the
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customers IOU four thousand dollars of
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the outstanding six thousand dollars we
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have to reduce the accounts receivable
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account by the amount the customer paid
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the end result accounts receivable has
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gone down and only two thousand dollars
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is still due from the customer they owe
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us two thousand dollars so it remains as
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an asset because we believe it has
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future economic benefit on December 18th
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the customer pays us the remaining two
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thousand dollars now what did we get at
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December 18th we got cash
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so assets increase what did we give away
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we gave back the remainder of the
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customers IOU the two thousand dollars
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that was still outstanding we have to
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reduce the accounts receivable account
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by the amount the customer paid and the
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end result is that the customers
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accounts receivable account now stands
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at zero although note that it took us a
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bit of work to get all that money from
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our customer now let's do one final
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example to show exactly what the cost of
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selling on credit is say that this time
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also on November 1st 2014 ABC company
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sells services for $18,000 to a customer
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on account providing terms of 210 net 45
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we know from our video on merchandising
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companies that this means if the
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Drimmer pays within 10 days they receive
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a 2% discount they only have to pay 98
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percent of their bill the net 45 means
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that if the customer pays after 10 days
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but before 45 days they have to pay 100
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percent of the outstanding balance say
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that on December 29th after repeat phone
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calls the customer has still not paid
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their account ABC company is getting
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worried that this customer will never
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pay what is the entry on November 1st
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what did we get and what did we give
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away we gave away a service so we record
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an increase in revenues of $18,000 we
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got a promise from the customer to pay
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in the future which is an accounts
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receivable accounts receivable increase
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by $18,000
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what is the entry on December 29th after
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we've repeatedly called the customer and
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we're getting worried that the customer
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will never pay their outstanding balance
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nothing because there's been no exchange
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as yet now we're at our year-end
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December 31st 2014 our accounts
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receivable for this customer is $18,000
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should we put that $18,000 on the
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balance sheet as an asset with future
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economic benefit does this accounts
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receivable balance have a future
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economic benefit equal to $18,000 that's
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questionable because this customer seems
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to be having problems paying their bills
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remember earlier in the video when I
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pointed out that there's a cost of
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selling on credit well now you know the
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cost the fact is some of the customers
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who we sell to on credit will never pay
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they're going to go bankrupt or they're
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just going to disappear overnight the
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more customers you sell to on credit the
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bigger the issue of non-payment of
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accounts receivable becomes and that's
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the biggest cost of selling on credit
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not only do you the seller have to delay
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the period between when you provide the
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service or deliver goods and when you
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actually get paid but you may never be
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paid at all so the question becomes are
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the accounts receivable of $18,000 at
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December 31st 2014 collectible in fact
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your future economic benefit from this
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customer may be zero so the issue with
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accounts receivable is how to value them
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at year-end this is complicated by the
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fact that you may not know who exactly
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won't pay your customers may all look
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good at year
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but from your past history you know that
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some of those customers won't pay how do
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we value accounts receivable at period
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end so that they represent their future
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economic benefit when we don't even know
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the names of the customers who will fail
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to pay in the future and that's the
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subject of our next video
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you
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