Accounts Receivable Aging

INTRODUCTION

Credit sales is one of the approaches in raising income. It has turned out to be an enticement for customers in retaining the business relationship with company and in time increase the company's sales volume. Credit sales is an effective means in optimizing company profit. However, the main issue that should be considered in providing credit sales is the customers' capability to settle accounts within agreed period of time. Thus, the aging of account receivables should be properly managed. For example, to decrease the risk associated with uncollectible payment, customer evaluation must be done before the sales are approved. The evaluations for the customers are based on the 5 Cs (Character, Capability, Capital, Condition, and Collateral) (Dawson, 1997:7). The same scenario is present in the operations of Appliance Centers.

Presenting terms and discounts to the customers is one of the techniques used to enhance their revenue. In practice, most of the appliance centers vary on how they implement terms. They offer a 10 to 24-month term payable monthly with interest ranging from 1 to 3 percent. That interest would be effectively applied if the client will not pay for the corresponding account on the given date. However, terms and discounts could vary depending on the agreement of both parties.

This study is formulated to describe the aging of receivables in the Appliance Centers in Lucena City. This study will reveal how receivables and uncollectibles are controlled and managed including the methods used and the current standing of accounts receivables. The researcher would like to be familiar with the practices used by the appliance centers. She chose this study because it interests her as a financial management major.

REVIEW OF RELATED LITERATURE AND STUDIES

The main objectives of a company are achieving optimal profit, improving the company's performance, and also expanding the company's operation. On the other hand, the growth of business nowadays also drives firm competition among companies in accomplishing their objectives. Thus, companies should maintain the effectiveness and efficiency of the operations with the purpose of evading immediate use of resources, which could initiate losses for the company in the short term and continuity issues in the long term.

At the present time, companies conduct various approaches in raising sales, for instance, by performing appealing promotion campaign, offering bonuses, discount, purchasing power, permitting credit sales, and others. These approaches are made to intensify customers' purchasing power and improve the company's revenue in the end.

Accounts receivable is money owed to you by your customers for goods or services that have been delivered or used, but not yet paid for. Accounts receivable are created when a customer purchases your goods or services but does not pay for them at the time of purchase. The invoice given represents a legal obligation for the customer to pay based on the terms agreed upon at the time of sale.

Accounts receivable are not always collected in full due to various reasons. Sometimes customers simply evade payment and the cost of pursuing them is more than the recoverable amount, sometime they become bankrupt, sometimes the debt becomes time-barred etc. A debt which is determined to be uncollectible is called a bad debt. Bad debts are written off from accounts as soon as they are determined. This is because a business does not expect future economic benefits from a bad debt and it no longer remains an asset.

It is stated and noted Zurada and Kunene (2010) that "accurately evaluating the credit risk posed by financial institutions loan granting decisions cannot be underestimated." They note this is clearly demonstrated by the large credit defaults in recent years. Also, Zurada and Kunene (2010) noted that credit-recording methods are not new phenomena. They have been used for decades to group customers into two categories: good credit and bad credit. A credit worthy customer otherwise a good credit customer is likely to repay the debt whereas a bad credit customer is likely to default. A proper bad debt accounting entry for debtors can provide a good measurement for solving debts related problems.

However, every interested business entity must have seen the warning sign in the year 2000, regarding debts. Mustafa and Rahman (1999) verified the implications of the rapid rate of growth in consumer debt and attributed it to aggressive and overly generous credit granting policies amongst others. He called for banks and companies to be cautioned in their way of handling debts granting. According to Mustafa and Rahman (1999) "massive inflows of foreign capital through the U.S. capital market depressed loan rates and contributed to credit expansion by making additional loan funds available at relatively lower costs." This attracts many borrowers. Therefore, keeping a close attention to the efficiency of recording and follow up of the receivables (debts) is worthwhile.

Furthermore, Hall, M., Muljawan, D., Suprayogi, & Moorena, L. (2009) discovered that default receivables (debts) recording and verification has gained a great deal of attention. Banks are called upon to be efficient in accounting because it helps them develop the risk of default hence; banking authorities can determine the overall strength of the banking system and its ability to handleadverse debt default conditions.

The best method for analyzing and recording bad debt hence making an estimate for debts that are likely to go bad will depend not only on the data structure, the characteristics of the data but more largely on the ability of a person handling the task to classify the data, and lastly on the objectives of classification.

Although bad debts are a grim reality of doing business on credit, this does not mean that one should stop selling on credit since a good credit