Business Transaction
Chapter One : Background literature
1.1 – Account Receivable(AR)
(AR and Management Policy: Theory and Evidence – Shehzad L. Mian & Clifford W. Smith, Jr)
The basis of my subject “Bad debt expense estimation model” stems from account receivable. Account receivable is the term used by companies to describe money owed to them by clients or customers for goods and services provided. Bad debt expense is that portion of account receivables that will not be collected. Therefore, without any receivables a company will not have bad debts, thus no need to estimate any bad debt expense.
Business to business transactions are mostly done with a promise to pay for goods and services provided at a later date. When a company sells its products or provides its services to other businesses or even individuals, it expects payment for the products or services. In most cases, these payments are not done immediately. The company then expects payment at some future date. This promise to pay becomes a receivable to the company providing the goods or services. Thus, the customer goes into a legal obligation to transfer cash to the company at some future date. Receivables form a large part of most company’s assets. Going through the balance sheet of every company, one would come across account receivables registered as an asset to the company. Financial and management accounting cannot over emphasize the importance of account receivable in every organization.
Being an asset, account receivable management has gained momentum in recent years in organizations and financial institutions. Since receivables ultimately stem from extending credits to customers, the issue of who to extend credits to and by how much cannot be stressed enough. It might not always be the case, but companies want to grant credit to other companies that are financially sound in order to have a greater degree of certainty that payment will be received in the future. Thus, it becomes absolutely important to
1.1 – Account Receivable(AR)
(AR and Management Policy: Theory and Evidence – Shehzad L. Mian & Clifford W. Smith, Jr)
The basis of my subject “Bad debt expense estimation model” stems from account receivable. Account receivable is the term used by companies to describe money owed to them by clients or customers for goods and services provided. Bad debt expense is that portion of account receivables that will not be collected. Therefore, without any receivables a company will not have bad debts, thus no need to estimate any bad debt expense.
Business to business transactions are mostly done with a promise to pay for goods and services provided at a later date. When a company sells its products or provides its services to other businesses or even individuals, it expects payment for the products or services. In most cases, these payments are not done immediately. The company then expects payment at some future date. This promise to pay becomes a receivable to the company providing the goods or services. Thus, the customer goes into a legal obligation to transfer cash to the company at some future date. Receivables form a large part of most company’s assets. Going through the balance sheet of every company, one would come across account receivables registered as an asset to the company. Financial and management accounting cannot over emphasize the importance of account receivable in every organization.
Being an asset, account receivable management has gained momentum in recent years in organizations and financial institutions. Since receivables ultimately stem from extending credits to customers, the issue of who to extend credits to and by how much cannot be stressed enough. It might not always be the case, but companies want to grant credit to other companies that are financially sound in order to have a greater degree of certainty that payment will be received in the future. Thus, it becomes absolutely important to