What happens to uncollected "Current" Account Receivables?

[FootNoted]

Do they rollover and remain "current" in the next period?

 

[ArcSine]

Yes, as long as it's still expected that they'll be collected within the 12 months following the bal sheet date.

Once you've obtained evidence that casts doubt on the collectibility of any particular account, that's a different matter. Then you'd write off, or boost your provision for bad debts, or take whatever other action is appropriate to the facts, and as guided by whatever set of accounting principles you're working under.

 

[FootNoted]

Thanks! I had never thought about this before, but was looking at a set of financials and started to think that this might be a way to overstate assets.

Much appreciated.

 

[ArcSine]

The potential for overstating receivables frequently appears in the form of a company continuing to carry accounts on the books long after their collectibility becomes questionable; i.e., refusing to write 'em off or at least mark up the doubtful accounts allowance.

Yep, your alarms start ringing when you're looking at the bal sheet of a company that does 12M per year in sales (1M a month, on average), management claims that their customers pay within 30 days, and yet you see 2M (a good two months' of sales) in AR on the balance sheet.

First thing you check for, of course, is seasonality....you might be looking at a Dec 31 bal sheet of a retailer, and they might indeed do 2M in sales just in December alone, even though they do only 10M the other 11 months of the year. But absent that, you start considering the possibility of some overstated AR.

 

[FootNoted]

I was looking at the AR account, and the current portion seemed to be overstated 3x compared to the calculation that I did based on subscriber data provided. I suspect this may be a situation like you explain above, just letting the receivables pile up.

They've just changed their payment policy, terminating the option that gives rise to a large share of long term receivables. My guess is that they saw collectability is a problem and are trying to steer customers to a payment plan front loaded with cash.

 

[KRHoffmanCo]

Yes, as long as it's still expected that they'll be collected within the 12 months following the bal sheet date.

Once you've obtained evidence that casts doubt on the collectibility of any particular account, that's a different matter. Then you'd write off, or boost your provision for bad debts, or take whatever other action is appropriate to the facts, and as guided by whatever set of accounting principles you're working under.

You can only write of bad debt if you are on an accrual basis for accounting.

Kenneth Hoffman, EA
Tax Counsel for Business, Professionals and Select Individuals
954-591-8290

 

[ArcSine]

You can only write of bad debt if you are on an accrual basis for accounting.

Kenneth Hoffman, EA
Tax Counsel for Business, Professionals and Select Individuals
954-591-8290

....true, and the existence of the AR on his bal sheet in the first place generally implies that they're on accrual.

Cheers!