Any time goods are sold or services are provided without an immediate payment in exchange, there is an account receivable created to record the amount due to the provider. While the intention is to collect 100% of these sales made on account, that isn’t always the reality. Companies have to be realistic in their collection expectations of their accounts receivable. Because of this, they often need to review and estimate their bad debt expense and their net realizable value of their accounts receivable, or in other words, what they really expect to collect of those accounts.
William Commerce, owner of Commerce Commercials, has some questions for you as the office manager of his company. For your initial post, draft a professional email to William Commerce to address the following questions:
Why do we as a company have to estimate and record anticipated uncollectible accounts? Can’t we just record the revenues earned when the cash comes in? Why would we even extend credit to customers who don’t pay their debts? What are these Generally Accepted Accounting Principles anyway, and which ones require this recording of revenues when earned and expenses when incurred, and the estimating of the bad debts?
Also, we don’t currently have a standard policy for credit management in our company. Please formulate a policy for granting, managing, and collection of accounts receivable for Commerce Commercials. This policy will go into the company handbook and on credit applications given to new customers seeking the option to make purchases on credit.