Accounting: The Language of Business - Vol. 2 (Intermediate: Part 149)

Dishonest money dwindles away (Proverbs 13:11) ...

Short-Term Operating Assets: Cash and Receivables (Part N)

by

Charles Lamson

Disclosures for Accounts Receivable and Notes Receivable

Companies disclose a summary of significant accounting policies relating to accounts receivable and notes receivable in the notes to the financial statements. The disclosures for receivables include accounting policies and the methodology used to estimate the allowance for uncollectible accounts such as a description of the elements that influence management's judgment and credit accounts, such as a description of the elements that influence management's judgment and credit risk. Companies also provide a description of the policy for writing off uncollectible receivables.

Companies commonly report net receivables on the balance sheet and disclose gross receivables and the allowance for uncollectible accounts in the notes to the financial statements. For the allowance, companies disclose activity during the year such as:

1. The allowance balance at the beginning and end of each period

2. Current period bad debt expense

3. Write-offs charged against the allowance

4. Recoveries of amounts previously written off

When a company has pledged (Pledging accounts receivable, or receivables, is when a business uses unpaid invoices, or accounts receivable balance, as collateral for a loan from a bank or lender. This can be a useful way for businesses to manage cash flow issues and get quick cash.) , assigned (Assigned accounts receivable is a type of business financing agreement where a company uses its outstanding invoices as collateral to borrow money from a lender. The company, or borrower, retains ownership of the accounts receivable and is responsible for collecting payments from customers. The borrower then uses those payments to repay the loan, plus interest and other fees. If the borrower defaults on the loan, the lender can collect the assigned receivables.), or factored (Factoring accounts receivable, also known as invoice factoring, is a financial practice where a company sells its unpaid invoices to a third party, called a factor, for cash. The factor then collects payment from the customer and pays the company a percentage of the invoice value as an advance, minus a factoring fee. The factoring fee typically includes a discount fee and a service fee. The discount fee is the cost of financing, while the service fee is a flat fee for administrative services. The price paid for the receivables is usually discounted from their face amount to account for the possibility that some of the receivables may not be collectible.) any accounts receivable, it must provide detailed disclosures of the amounts, terms, and collateral. Exhibit 9.8 provides an example of Kellogg Company's accounts receivable disclosures. Kellogg provides a table showing all its accounts receivables, composed primarily of trade receivables, of $1,106 million and $1,169 million in fiscal 2016 and 2015, respectively. Another table provides the changes from the beginning balance to the ending balance for the allowance for doubtful accounts. 

EXHIBIT 9.8 Accounts Receivable Disclosures, Kellogg Company, Financial Statements, December 31 2016

Source: Kellogg Company, Annual Report, December 2016

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 468*

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