Contents
- What is accounts receivable?
- When does accounts receivable arise?
- Types of accounts receivable
- Accounting, management, and inventory
- Debt collection
- Writing off accounts receivable
- Insurance of accounts receivable
- Relationship between accounts receivable and accounts payable
What is accounts receivable?
Accounts receivable refers to all documented debts and obligations that arise between individuals and legal entities. This means that accounts receivable includes all amounts owed to the company by its clients, contractors, and partners. It is important to note that such an obligation can arise in various situations when one party to a transaction fails to fulfill its financial obligations.
When does accounts receivable arise?
Accounts receivable is formed in cases where one party to a transaction does not make payment for goods or services at the time of receipt. For example, if a supplier sends goods and the buyer pays for them later, this will be considered accounts receivable. Another common example may be a situation where a client purchases a product on installment. Thus, any amount that the company expects to receive but does not actually receive is considered accounts receivable. This type of debt can persist for both short and long terms.
Types of accounts receivable
Accounts receivable is classified based on various criteria, including:
By grounds of occurrence
- Debts of partners
- Debts of contractors
- Debts of suppliers
- Debts of buyers
- Debts of employees
- Debts of accountable persons
- Debts of founders
- Debts of government entities
By repayment terms
- Short-term — repaid within one year
- Long-term — with a repayment period of more than one year
By obligation execution terms
- Normal — payment due date has not yet arrived
- Overdue — payment due date has already passed
By degree of security
- Secured — guaranteed by a guarantee, pledge, or bank guarantee
- Unsecured — guaranteed only by a contract
By likelihood of repayment
- Normal — there are no doubts about payment
- Doubtful — there is a likelihood of non-repayment
- Hopeless — the likelihood of recovery is absent
Accounting, management, and inventory
Accounts receivable is considered an asset of the company and is reflected in the balance sheet under the line "Accounts receivable." Each ruble of debt is viewed as unearned profit, so effective management of accounts receivable is extremely important. The main tasks of management include:
- Establishing rules for working with accounts receivable
- Defining acceptable working capital for receivables
- Formulating payment terms, including penalties for late payments
- Developing criteria for assessing potential debtors
- Considering discounts for early repayment of debts
- Inventorying and analyzing accounts receivable
- Monitoring timely repayment of debts
- Extrajudicial and judicial collection of overdue debts
Inventory of accounts receivable is conducted at least once a year and includes checking all debts as well as preparing reports with data on debtors and amounts owed.
Debt collection
If the payment deadline has passed, the company begins the collection process. The first step is to send a claim indicating the amount of the debt and the expected repayment date. If the debtor does not respond or does not satisfy the creditor within 30 days, the matter is referred to the Arbitration Court with all supporting documents attached. Bailiffs may assist in recovering money if the claim is approved. The statute of limitations for claims is three years but may be extended in certain cases.
Writing off accounts receivable
If the debt cannot be collected, it is written off the balance sheet and reflected in other expenses. Written-off accounts receivable are kept on off-balance sheet accounts for 5 years for potential recovery. The write-off is conducted based on an inventory act and an order from management.
Insurance of accounts receivable
Insurance of accounts receivable helps minimize risks; however, this service can be expensive and is used in risky operations. It is important to carefully review the terms of the contract, as some insurance companies may offer complex compensation payment conditions.
Relationship between accounts receivable and accounts payable
Accounts receivable is contrasted with accounts payable, which represents the company's debts to other parties. The ratio of accounts receivable to accounts payable is an important indicator of financial efficiency and influences investors' decisions regarding investments. This ratio is calculated using the formula:
Ratio = accounts receivable / accounts payable
The optimal value ranges from 0.9 to 1.1, indicating balanced financial management of the company. If the ratio is greater than one, it may indicate liquidity problems, while a value of less than one indicates rapid turnover of accounts receivable.