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| What is Accounts Receivable and How to Write It Off. |
Accounts receivable refers to money owed to a company by customers or other parties for goods or services already provided but not yet paid for. In simpler terms, it's when a company is waiting to get paid after delivering a product or service.
For example, if a business supplies plastic cups to a café but hasn’t received payment yet, the amount owed by the café becomes the business's accounts receivable. Meanwhile, for the café, this is a payable debt—money it owes.
Types of Accounts Receivable
1. By Payment Term
- Short-term: Expected to be paid within a year.
- Long-term: Expected to be paid after more than a year.
2. By Status
- Current: Payment is still within the agreed timeframe.
- Overdue: Payment is past the due date.
3. By Likelihood of Payment
- Doubtful: The debt may or may not be paid on time.
- Bad debt: There's little to no chance of the debt being paid, often due to the customer going bankrupt or exceeding the legal time limit for collection.
4. By Source
- Suppliers and Contractors: Owe for delivered goods/services.
- Customers: Haven’t paid for goods or services received.
- Tax Authorities: The company may have overpaid taxes and is owed a refund.
- Employees: Might owe for advances or loans given by the company.
How to Manage Accounts Receivable
1. Regular Audits
Conduct regular reviews of outstanding debts to understand why and how they arise. This can help catch problems early.
2. Set Clear Rules
Ensure there are policies in place for managing payment terms and following up with customers as deadlines approach.
3. Set Limits
Decide on a maximum amount of credit to allow each customer. This helps prevent excessive unpaid debts.
4. Penalties for Late Payments
Introduce late fees or penalties for overdue payments to encourage customers to pay on time.
5. Assess Customer Reliability
Before offering credit, check the customer's financial history, including any legal disputes or bankruptcy records.
How to Collect Accounts Receivable
1. Negotiate
Sometimes debts can be resolved through negotiation. The customer might offer to pay in installments, or you might agree to accept goods or services as payment instead of cash.
2. Send a Legal Notice
If negotiations fail, you can send a formal notice demanding payment. If they still don't respond, you can take legal action.
3. Go to Court
If all else fails, take the matter to court. You'll need proof of the debt, such as invoices and contracts. Depending on the amount, you can either request a court order or file a lawsuit.
How to Write Off Accounts Receivable
If it becomes clear that a debt won't be paid, you can write it off as a bad debt. Here’s how:
1. Audit the Debt
Conduct a thorough review and prepare a report explaining why the debt can't be collected.
2. Gather Documentation
Collect all the necessary legal documents to prove that the debt is uncollectible, such as proof that the debtor is bankrupt.
3. Issue a Write-Off Order
The company's management must issue an official order to write off the debt. This ensures that the uncollectible amount is removed from the company’s books.
4. Keep Records
All documents related to the write-off should be stored for at least five years in case tax authorities need to review them.
In conclusion, accounts receivable is a normal part of doing business, but managing it properly is key to maintaining a healthy cash flow. When debts can’t be collected, writing them off might be the only solution.
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