Are you a business owner or accountant looking to better understand receivables in accounting?
US GAAP ASC 310 guides recognizing, measuring, presenting, and disclosing receivables. This post will discuss the key concepts of this standard and how it affects your financial statements.
By understanding ASC 310 – Receivables In Accounting, you can ensure that your financials are accurate and compliant with US GAAP standards. You’ll be able to make more informed decisions about your business operations and have greater confidence in the accuracy of your financials.
Read on to learn more about ASC 310 and Receivables.
What is US GAAP?
US GAAP is a common set of accounting principles, standards, and procedures. Public companies in the United States must follow GAAP when they compile their financial statements. To that end, the Financial Accounting Standards Board (FASB) maintains GAAP. Moreover, the board issues new rules as necessary to ensure that GAAP remains up-to-date.
Where Can I Research GAAP?
You can research GAAP through FASB’s website. They provide free online access to the Accounting Standards Codification, which is the only authoritative source for US GAAP. FASB and the AICPA also provide access to other authoritative literature that supplements the GAAP Hierarchy.
To access the Accounting Standards Codification, visit asc.fasb.org. Anyone can access the codes using a basic account. For more advanced features, you can set up a professional account. To that end, if you work at a company subject to GAAP rules, your company likely has a professional account.
What is ASC 310?
ASC 310 provides general guidance for receivables and notes that receivables arise from credit sales, loans, or other transactions. This code requires companies to classify their receivables as either current or long-term. The classification of a receivable must be based on when it is expected to be collected.
What Are Accounts Receivable?
Accounts receivable (AR) is the amount of money a business expects to receive from its customers. These amounts are recorded in a company’s books when they become due and payable, regardless of whether the customer has paid. The outstanding balance of these payments is considered “receivables.”
An example of accounts receivable is when a business provides a service or product to its customer for $100 and sends an invoice for the amount due. The customer agrees to pay the invoice within 30 days. In this case, the business will record an accounts receivable of $100 once it sends out the invoice.
From a balance sheet perspective, accounts receivable are current assets. They are recorded on a company’s balance sheet once goods or services are provided and then converted to the cash account once payment has been received.
Accounts Receivable vs. Accounts Payable
Accounts receivable (AR) is the opposite of accounts payable (AP). An account payable is the amount a company owes its suppliers, vendors, or other business partners. In accounting terms, accounts receivable and accounts payable are current liabilities that must be managed properly for businesses to remain solvent.
From a balance sheet perspective, accounts payable are a liability account. They represent money owed from a company to its vendors or suppliers.
Why Does ASC 310 Matter To My Business?
The presentation and disclosure of financials can have a major impact on the decisions made by users of those statements. For example, if a company or individual is considering investing in another company, the investor will want to know the total income of that company and how it may impact future returns.
ASC 310 follows the framework set by ASC 205 and requires companies to adequately disclose and present their accounts receivable at a certain level of detail. This section requires explicitly the level of detail in tracking and reporting your accounts receivable balance. To that end, the more complex your business, the more disclosures the codes require.
This section ensures that investors have enough information to make informed decisions and that companies cant mask their performance.
ASC 310 Deep Dive
US GAAP code ASC 310 is broken down into four sections discussing and establishing the accounting standards for receivables.
ASC 310-10: Overall
Under ASC 310, the following items are considered receivables:
- Trade accounts receivable
- Loan syndications
- Factoring arrangements
- Standby letters of credit
- Financing receivables
The code details how accounts receivable should be measured initially and continuously. It also covers unique items, such as factoring and how they impact receiveable treatment.
There is a special call out for construction receivables and loan receivables, which require special treatment.
ASC 310-20: Nonrefundable Fees and Other Costs
ASC 310-20 provides guidance on the recognition, measurement, derecognition, and disclosure of nonrefundable fees, origination costs, and acquisition costs associated with lending activities and loan purchases.
The guidance applies to nonrefundable fees and other costs related to a loan, including acquisition costs. These fees must be measured at initial recognition, amortized over the loan term, and disclosed in accordance with GAAP.
ASC 310-30: Loans And Debt Securities Acquired With Deteriorated Credit Quality
This Subtopic offers guidance on recognizing, measuring, and disclosing loans acquired after their credit quality had deteriorated since they first originated. These loans must also have been acquired through a transfer where it is likely that the investor will not receive all of the payments that are contractually required at the time of acquisition.
A loan or group of loans is always transferred at a price less than its contractually required payments receivable. The difference between the price and the contractually required payments receivable is attributable to the time value of money and may also be attributable to any of the following:
- Changes in interest rates between the loan’s origination and transfer dates
- Changes in the credit quality of the borrower between the loan’s origination and transfer dates
- Other factors
- Some combination of all three reasons.
Deterioration may be evidenced by sources such as Fair Isaac Company (FICO) scores (an automated rating process for credit reports), downgrading, decline in collateral value, or past-due status.
ASC 310-40: Troubled Debt Restructuring By Creditors
This section deals with the accounting treatment of receivables that are subject to a troubled debt restructuring. The standard provides guidance regarding differentiating between a new loan and a troubled debt restructuring. Under ASC 310-40, if certain conditions exist, creditors must recognize an impairment loss equal to the difference between the carrying amount of the loan and its fair value.
Accounting For Receivables
In general, receivables are assets that arise from the transfer of goods and services from one entity to another and represent an obligation to repay. Under US GAAP ASC 310, these receivables must be classified as either current or non-current based on their expected collection date. In addition, receivables must be recorded at their net realizable value, which is the estimated amount that will be collected after deducting any related costs.
Accounts receivable represent accrual accounting since, in cash-based accounting, you only record revenue when payment is received. To recognize a receivable, first, your business must deliver goods or services to a customer. You then record a journal entry on the general ledger, which credits the revenue account and debits the receivables account.
The entry increases the customer’s account balance and increases your asset account.
You must audit and review account receivables balances at the end of every accounting period to ensure you stay on top.
An off-the-shelf accounting system can help you automate much of this process and track accounts receivable. For example, the system automatically records each sale and corresponding revenue if you sell products to customers. The system also creates an invoice for the customer and generates the journal entry for the receivable.
Going a step further, it can help you track unpaid invoices and customer payments as they come in.
Managing Receivables And Cash Flow In A Business
Accurate receivables accounting is important in managing cash flow and maintaining your company’s financial health. In order to effectively manage cash flow, it is necessary to monitor the aging of receivables and identify any potential areas where customers may be unable to pay their debt. For example, if a customer’s payment history changes or they become delinquent on payments,
Accounts Receivable Process
Having a clear process for managing receivables and tracking outstanding invoices is critical to your company’s bottom line. Here is a great way to structure the process:
Step 1 – Evaluate Company’s Financial Health Before You Extend Credit
Before letting companies purchase on credit terms, evaluating their ability to pay is essential. This process should include verifying their credit rating, reviewing their current financial standing or other relevant documents, and ensuring a history of successful payments.
Step 2 – Monitor Credit Limits
It is also important to monitor customers’ credit limits. You should set realistic payment terms that are in line with the customer’s financial capacity and be sure to send invoices as soon as possible.
Step 3 – Follow Up on Late Payments
Pursuing payment following established guidelines and procedures is important when customers are delinquent. In addition to periodic invoices, your finance team should reach out directly about collecting payments as customers go past due.
Step 4 – Engage A Collection Agency
When customers are unresponsive, it might be necessary to enlist the help of a collection agency. The agency should be experienced in accounts receivable collections and comply with all applicable laws. They will typically take a cut of the invoice upon collection.
Step 5 – Review Uncollectible Accounts And Record Bad Debt
If an account is determined to be unable to pay, the finance team should make a formal assessment of the potential uncollectible amount. ASC 310 sets out guidance for receivables accounting, which should be followed when assessing and writing off bad debts.
Minimizing Accounts Receivable
Here are some pro tips to minimize each and every account receivable and maximize cash flow:
- Offer a 2% discount for early payment, often referred to as 2/10 net
- Make sure all customers receive periodic invoices
- Give special payment terms to frequent or special customers once you know they pay their bills
Monitoring Accounts Receivable
Since accounts receivable are critical to the cash flow puzzle, monitoring them is essential for your business. Working capital management can make or break your short-term liquidity. Here are some different methods your business can use:
Accounts Receivable Aging Schedule
This is typically used to monitor the aging of receivables. Under US GAAP ASC 310, an Accounts Receivable Aging Schedule must be used for all current and non-current accounts receivable. This schedule aims to identify any possible unpaid balances that may need to be written off as bad debt expense or disputed by the company. As part of this process, companies must review the customer’s payment history and creditworthiness to determine if they are likely to pay their debt.
Accounts Receivable Turnover Ratio
The accounts receivable turnover ratio, or A/R turnover, measures how quickly a company collects its unpaid bills. It also provides an indication of how efficiently the business is operating. The formula for calculating it is to divide the total outstanding receivables and divide by the total amount billed over a specific period.
Days Sales Outstanding
Days sales outstanding, or DSO, is another way to measure the effectiveness of a company’s accounts receivable process. It measures how customers pay invoices. The formula for this ratio is average Accounts Receivable divided by net credit sales multiplied by the number of days in a period.
Accounting for receivables is an integral part of financial management. The US GAAP ASC 310 provides guidance on accounting for receivables and handling unique situations like factoring, construction receivables, and deteriorating credit quality. In addition, managing receivables and cash flow is critical for businesses. The most successful accounts receivable process includes a system of invoicing, payment terms, and collection processes tailored to each customer’s needs. The accounts receivable turnover ratio is essential for monitoring performance and ensuring liquidity. All in all, effective management of receivables is essential for businesses to maintain financial success.
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