Monday, 25 June 2018

Account Receivable Is the Asset of The Company


Let us understand certain terms before we try to understand how account receivable is an asset to the company.

Account receivable: It is an unpaid portion of the total value (Price of the Commodity or service rendered) which the buyer of good/services is bound to pay to the seller for the good/services consumed by the customer from the seller. It will appear on the Asset side in the Balance sheet. Let’s understand from an example: A (Buyer) bought a product from B (Seller). Product cost is Rs100/-. At the time of purchased B paid Rs 70/- only. Hence Rs 30/- is the Account receivable. i.e. Rs 30/- (being an unpaid portion of the total value) is the amount which A is legally bound to pay to the owner (B).

Account payable: Accounts Payable Services is the unpaid portion of the total value (Price of the Commodity or service rendered) which the buyer of good/services is bound to pay to the seller for the good/services consumed by the customer from the seller. It will appear on the liability side in the Balance sheet.

Credit limit: It is the relaxation provided to the buyer of product/service to a specified limit in paying the amount due to him for a defined period of time. It is given by seller of product/service in order to attract more sale. At the same time, it gives an ease of business to both the parties.  The credit limit is set by the seller on the basis of finances of the buyer, previous record of the buyer and many times bases the relationship between buyer and seller. Example: A (Buyer) bought a product from B (Seller). Product cost is Rs100/-. At the time of purchased B paid Rs 70/- only. Hence Rs 30/- is the Account receivable. i.e. Rs 30/- (being an unpaid portion of the total value) is the amount which A is legally bound to pay to the owner (B). To the unpaid portion (Rs 30/-) of total value (Rs 100/-) 3 months time period is given. This 3 months is the credit limit and the buyer are bound to pay this Rs 30/- within 3 months of the credit time period.


Bad debts: The account receivable which is not received is anytime after the expiry of credit limit is called bad debts.

Accounts receivables are a current asset and thus are a measure of liquidity, or ability to cover short-term obligations without additional cash flows.

Accounts receivables Services may be further subdivided into trade receivables and non-trade receivables, where trade receivables are from a company's normal business partners, and non trade receivables are all other receivables, such as amounts due from employees.

For the time the amount receivable is not received by the seller of the product/service, it will appear at the Asset side of the balance sheet. It appears on the asset side as a buyer of product/service is legally bound to pay this money and in case it is not received then the seller can take the recourse of legal action and initiate the legal proceedings against such buyer. Companies can approach national company law tribunal in the case of the cases of debt recovery. As per section 141 of the Companies Act 2013 any person who is aggrieved by the order of NCLT, it can approach to national company law appellate tribunal (NCLAT).

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