Globalidad

PAYABLES MANAGEMENT

DEFINITION

• The administration of a company's outstanding debts, or liabilities, to vendors for purchases of goods and services made on credit

Here are some ways for using cash wisely:

• Take full advantage of creditor payment terms. If a payment is due in 30 days, don't pay it in 15 days.

• Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.

Here are some ways for using cash wisely (Cont’d):

• Communicate with your suppliers so they know your financial situation. If you ever need to delay a payment, you will need their trust and understanding.

• Carefully consider vendors' offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a chance to reduce overall costs.

Here are some ways for using cash wisely (Cont’d):

• Do not always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price

Receivables

INTRODUCTION• From the accounting point of view, accounts

receivables refer to those accounts arising from the sale of goods and services on credit in the ordinary course of business.

• Here, goods and services are sold but the money for them does not change hands straight away.

INTRODUCTION (Cont’d)• For example, when goods were sold, the

customers are given a specific length of time, such as 30 days, to settle their debts.

• These customers’ account are called accounts receivables or trade debtors account in the balance sheet.

• In balance sheet, accounts receivables are classified as current assets because they are expected to be collected in cash within the next financial year of the business.

Notes or Bills Receivables• Another means of extending credit to

customers is by the use of negotiable legal documents, referred to as bills of exchange and promissory notes.

• Bills of exchange- is a written order made by a debtor to pay a certain amount of money on a predetermined date known as maturity date in the future.

Notes or Bills Receivables (Cont’d)

• Promissory note- is a written promise made by a debtor to pay a certain amount of money on a predetermined date in the future.

• For accounting purpose, both bills of exchange & promissory note are collectively referred to as bills receivables above. The credit period under all bills receivables range up to a maximum of 180 days.

• It shown under current assets in the balance sheet of the business granting credit

Recognition Of Account Receivables.

• Under the accrual concepts, accounts receivables are recognized when goods and services are provided and invoices issued to the customers.

• For example, when credit sales is made, the sale is recognized at the time that the invoice is sent to the customer.

Accounting entries:

Date Particulars Debit(RM) Credit(RM)

Account Receivable account Sales revenue account

XXXX

General Journal

Collectability of Debts• There are some risks associated with credit

transactions. • The main one relates to the collectability of

amounts owing on sales invoices. • Experiences shows that not all amounts

owing from receivables are collected.• This uncollected portion is known as bad

debts.

Bad & Doubtful Debts• Bad debts are amounts of debts, which are

considered uncollectable after all affords have been made to collect them.

• Possible reasons that may give rise to bad debts:

- Debtor experiences financial difficulties, leading to bankruptcy

- Debtor cannot be trace- Death of a debtor

Bad & Doubtful Debts (Cont’d)• If a debt cannot be collected, then it would be

prudent to remove it totally from the account and to charge the amount as an expense to income statement.

Entries To Record Bad Debt

Date Particular Debit (RM) Credit (RM)

Bad debt expense Account receivables account (Being bad debts written off)

XXXX

General Journal

• Bad debts are treated as a loss or an expense and as such are required by the matching concept to be matched against the credit sales made in the same period.

• At the end of the accounting period, bad debt account is closed to income statement.

Accounting Entries

Date Particular Debit (RM)

Credit(RM)

Income Statement Bad Debt expense(being closing of bad debts account to an income statement)

XXXX

Matching concept

• States that, cost(expenses) incurred during the accounting period can be identified with its corresponding revenues.

• If an enterprise earns revenues from the sale of product A in year X, then all the costs incurred in earning the revenues can be identified and matched with these revenues in year X.

Allowance method of accounting for bad debts

• Since the specific amount that will eventually become bad are unknown, the uncollectible amount needs to be estimated at the end of the accounting period.

• It is known as doubtful debts.

Example:

• Assume that credit sale of a business were RM20,000 in year 2008. The operating expenses for that year were RM8,000 and there was a bad debt of RM1,200 resulting from sale of the year.

• The effect of this estimation is that a certain amount of expected expense is matched against the current revenues instead of waiting till bad debts are known.

2008 (RM)

Sales 20,000

Less: Expenses (8,000)

Bad Debt Expense (1,200)

Profit 10,800

Journal entries to effect this transaction

Date Particular Debit (RM) Credit (RM)

Bad debts expense Allowance for Doubtful debt(being estimate of allowance for doubtful debt)

1,2001,200

General Journal

Closing entries at the end of the accounting period

Date Particular Debit(RM) Credit(RM)

Income Statement Bad debts expense(being estimate of doubtful debts)

1,2001,200

Methods of estimating doubtful debt

• Specific identification method• Percentage of debtors method• Ageing of accounts receivable• Percentage of net credit sales method

Methods of estimating doubtful debt (Cont’d)

• Specific identification method- Under this method, the business is able to

identify some specific debts where the customer is known to be in financial difficulties and therefore the amount owing may not be recoverable.

- The allowance for such debt is known as specific allowance.

Methods of estimating doubtful debt (Cont’d)

• Percentage of debtors method- Under this method, it may not be possible to

indicate the precise debtors that will not pay but an estimate may be made that a certain percentage is likely to be uncollectible.

- The allowance made against this percentage of receivable is known as a general approach

Methods of estimating doubtful debt (Cont’d)

• Ageing of accounts receivable- Under this method, a schedule is prepared

analyzing and classifying the account receivable by age.

- The individual account receivable is classified into age groups based on the number of days the account has been outstanding.

- For each age group, the related amount is multiplied with the fixed percentage pre-determined by the business.

Methods of estimating doubtful debt (Cont’d)

• The older the accounts receivable, the greater the possibility that it will become bad, thus a higher fixed percentage is multiplied to determine the amount of doubtful debt.

Example:

Age group Amount(RM) Estimated bad debt percentage

Amount

Not yet due 60,000 1 600

1- 30 days Over 40,000 due 2 800

31- 60 days Over 15,000 due 5 750

61- 90 days Over 10,000 due 10 1000

91- 180 days Over 5,000 due 15 750

Over 180 days Over 4,000 due 20 800

Total 134,000 4,700

• From the above, it shows that RM4,700 is the balance needed in the allowance for doubtful debts account.

• Three methods above are often called the Balance Sheet approach because the account receivable, a balance sheet item, is used in determining the doubtful debt.

Methods of estimating doubtful debt (Cont’d)

• Percentage of net credit sales method- This method often called the Profit and Loss

Statement approach.- Under this method, an estimate of doubtful

debt is made on the total amount of the net credit sales of the year.

Example:

• Assume that the net credit sales for the year is RM900,000 and from the past experience it shows that 0.05% of net credit sales each year was written off as bad.

• Allowance for bad debts

0.05% X RM900,000= RM4,500

Example 3:

• Assume that the accounts receivable at 31 December 2007 showed a debit balance of RM 25,000. The business has decided to provide a 5% allowance for doubtful debt.

Writing off bad debt

Example 4:

• Assume that on 4 Jan 2008 an amount of RM500 was proven uncollectible and the business decided to write of these debts.

Journal entry

Date Particular Debit(RM) Credit(RM)

2008Jan 4

Allowance for doubtful debt Accounts Receivable(Being bad debts written off)

500500

Management & controls for receivables

In order to manage the accounts receivables:

• It is common now days for most businesses of any size to establish a credit department.

Among the typical functions of credit department are as

follows:

Credit policies

• It is necessary for the business to access the credit worthiness of its potential credit customers

• Factors to be considered in assessing the customers’ creditworthiness include gathering information about customer’s current earning, current obligation, financial position, past experience in handling obligation & etc.

• Any policies establish by the business must not too tight or too generous.

Credit policies (Cont’d)

• A tight policy means that business will lose potential customers to competitors and hence sales revenue will be affected.

• On the other hand, if the policy is too generous, losses may be incurred in future.

Monitoring credit policies

• This department is involved in monitoring the handling of cash collection from these late prayers.

• Steps may include sending reminder notices, calling them and etc.

• If it fails, then a decision must be made whether to write off the accounts as bad debts.

Internal controls of accounts receivables

• There should be adequate controls establish over accounts receivables.

• One of the most important features of internal controls pertaining to accounts receivables is proper segregation of duties between personal handling accounts receivables.

Internal controls of accounts receivables (Cont’d)

• For example, the employee responsible for handling cash receipts from customers must not maintain the accounting records or handle cash receipts should not be given authority to issue credit memo for sales returns or to authorize the write off of accounts receivable as uncollectible.

Internal controls of accounts receivables (Cont’d)

• However, it should be noted that it is often impossible for small business to establish a proper segregation of duties for incompatible functions mainly because all functions related to accounts receivable are handled by one person.

• Under this situation, the possibility of fraud is high.

Internal controls of accounts receivables (Cont’d)

• For instance, employee in this situation may be able to remove cash collected without making any records of the collection.

• Next, the same employee may issue a credit memo for sales returns by the customers or authorize accounts receivable as bad debts.

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