Accounts receivable is a crucial current asset of the business.
Are you wondering why it is?
The answer is simple.
Its one just step behind from being converted into money.
Entities need liquidity to sustain in the business irrespective of the form of money (either cash, bank, bills or check).
Thus, there is a need for a team to take care of the receivables.
The demand for the accounts receivable book keeping, managing and optimizing those resources is always exponential.
Lets delve into the accounts receivable interview questions and answers below.
Accounts Receivable Interview questions and Answers
What’s the difference between accounts receivable and debtors?
Accounts receivable (AR) is a comprehensive term whereas debtor balance is a sub-set of the AR. Let’s unfold the accounts receivable concept.
There are two categories of Accounts receivable as below
- Trade receivable
- Non-Trade receivables.
Trade receivables are the receivables directly related to the trading activity of the business. Generally, trading is correlated with the stock exchange intra-day or investing. However, that’s not the case here.
Trading here means the primary purpose of establishing a business. For example, procuring goods from vendors and selling goods on an online platform is the trading activity of the Amazon e-commerce website.
Trade receivable comprises debtors, notes receivable, bills receivable (not much in place during these days), etc.
Non-trade receivable means the interest receivable (against the finances made to subsidiaries to support them), dividends receivable (against the shares held in different companies), employee receivable (against the salary advances provided), etc.
What does Accounts receivable mean?
The keyword here is receivable, which means an inflow. GL accounts that owe amounts to the business are termed as Accounts receivable.
Why should we record the accounts receivable transactions?
Accounting’s sole purpose is to record all the financial transactions to track the expenses, gains, losses, and incomes and get a clear picture of assets and liabilities at any given time. Without accounting, it’s like aiming at a target without knowing the direction.
If we know whether the business making profits or losses then we can alter or continue the business’s strategic decisions.
The above answer applies to Accounts receivable as well.
Benefits of recording the accounts receivable
- Understand how much we have for working capital,
- Finances available for expansion
- Deciding upon the quantum of short-term or long-term financing needs
- Analyzing the cash flow needs
Why do you record the bad debts journal entry?
Provision for Bad debts vs Bad debts is two different concepts.
The first one is a provision (not an actual loss). Said differently, provision is an expected loss but there is no certainty regarding the amount. However, Bad debts are actual and known losses to the business.
Say, for example, one of the customers had filed a bankruptcy. Then, it’s a clear case of bad debt loss.
Generally, we can calculate the provision as a percentage of the total accounts receivable. Business determines the percentage as per the prior year’s experience.
Both of them are recorded to reduce the accounts receivable to the extent of loss either expected or actual.
How do you record the bad debts journal entry?
Bad debt is a loss to the business. Per Accounting Rules for Nominal GL, we need to debit the losses and expenses and credit the incomes and gains.
Considering the happening of loss is certain, we can record it as a reduction to the accounts receivable or debtor’s balance.
Bad debts A/c Dr
To Accounts Receivable A/c
Are sales-related bad debts an expense or income to the business?
The answer is neither of them. That’s because bad debts are a loss to the business. Expenses will be associated with an income-generating activity. Loss doesn’t result in revenue generation. Rather, Loss reduces the income.
How do you record the bad debts recovery journal entry?
Bad debts recovery is a bonus.
The debt which is once thought to be bad, is turning out into cash.
Recovery of bad debt implies that business recorded some time back some accounts receivable as loss (i.e., bad debts). So, we record the bad debts recovered as income to the business.
The entry goes like this –
Bank/Cash A/c Dr.
To Bad debts Recovered Income A/c
Are you wondering why does the bad debts recovery happens?
Think of a business where all the assets are lost due to a fire accident in the office building. The insurance policy doesn’t cover those burnt out assets. Sale of products to such business is nothing but a bad debt. There is no chance of recovery.
However, the debtor is able to realize some cash due to sale of business and goodwill. This amount is shared among all its creditors.
Bad debts recovery is not a miracle 😀
There is a good chance of this happening in the business world
Summary
Accounts receivable is a liquid asset, which is expected to be realized within one year. We need to understand how to account for it. The Accounts receivable interview questions will focus on the understanding of the different steps in recording the receivables. This role might involve doing follow ups, being strategic in dealing with your business customers and ensure the optimizing the resources.