Examples of Accounts Receivable
The following Accounts Receivables example provides an outline of the most common sales receivables in accounting. Accounts Receivables are short term or long-term future economic benefits generating assets that are expected to be realized or converted into cash or any other asset. Each example of accounts receivables states the topic, the relevant reasons, and additional comments as needed.
Top 4 Examples of Accounts Receivable
For understanding accounts receivable examples, we have created structure as follows:
- Situation
- Basic Guideline governing its treatment
- Practical example
Example #1 – (Sale of Goods)
A trader Mark Inc. dealing in FMCG products sells 20,000 pieces of soap each having a market price of $20 (total value $4,00,000) to Henry Inc. Against this purchase, Henry Inc. paid $1,00,000 in cash and agreed to pay the balance after 6 months.
Solution:
Calculation of Accounts Receivable can be done as follows:
Here, Mark Inc. generated an asset in the form of accounts receivable as Henry Inc. Since, a customer had paid $1,00,000 in cash and has agreed to pay rest after 6 months, Mark Inc. will show Balance of $3,00,000 as accounts Receivable in its balance sheet.
Suppose, in the above example, Henry Inc becomes insolvent after 3 months and it is estimated that the company can recover only $1,00,000. Then, It will be reduced to $1,00,000 and the remaining $2,00,000 will be charged to profit and loss A/c as bad debts.
Note:
Similarly, all goods supply accounts receivable can be identified and accounted for.
Example #2 – (Supply of Service)
Tony Builders Inc. (Construction contractor) gives the following data regarding the construction agreement of flat. Determine account receivable as on 31st March 2019:
- Total Contract Price $1,00,000
- Installment received 5 out of 10
- Additional cost incurred in Wall decoration (to be recovered from a customer)$2,000
- A loss incurred due to the theft of construction material $10,000
- Interest on delayed payment incurred on fourth installment @12%p.a. for 2 months.
- Completion Certificate legal cost to be reimbursed from customer $5,000 payable after 2 years (estimated date of completion of construction)
Solution:
This is the case of sale of service (Completion of under-construction property). To determine debtors, Mark Inc. needs to identify all expenses which can be recovered from Henry Inc.
Debtors standing in books of Tony Inc. as on 31/03/2019 will be calculated as follows:
Example #3 – (Money Lending Industry)
Bank of America lent Mark Inc. $5,00,000 on 01st January 2017 for purchasing machinery to be used in business on the following conditions:
- An interest rate of 12% p.a. will be charged,
- The principle will be repaid in 5 equal annual installments,
- Loan Processing fees paid as on 01/01/2017 $ 2,000
Determine accounts receivable at the end of the Year 2017, 2018, 2019, 2020, 2021.
Solution:
This is the case of the money lending service industry like Banks, NBFCs. The main Income of such industry is generated by Interest (charge against the use of money for a particular period of time). To determine debtors at each year-end, we need to prepare a loan amortization table for 5 years as follows:
Example #4 – (Deferred Revenue – Sale of Magazine)
Mark Inc., sells a popular monthly magazine on a subscription basis on the following terms:
- One Year Subscription fees – $10,000
- Two Year Subscription Fees gets a discount of $2,000
- Five Year Subscription Fees gets a discount of $4,000
- All amounts are payable immediately
Louis, Denial, Henry opts for each option respectively on 01/01/2019. Identify accounts receivable for Mark Inc. as on 31/01/2019
Solution:
Selling of magazine on a fixed subscription basis becomes a case of deferred revenue since the magazine will be supplied on a monthly basis but consideration is received in advance.
Under this, the amount is received in advance for supplying goods i.e. magazine over a period of time. Here, accounts receivable will be calculated as follows:
You can refer the given above excel template for a detailed calculation of accounts receivable.
Conclusion
Similar to the above examples there can be numerous examples of the sale of goods and services. A business needs to deposit various amounts to government authorities, vendors as advance, security deposits which will be refunded in the future. This is also cases of debtors shown under advances. Also, there are various other deferred revenue examples like annual maintenance contracts for cleaning, housekeeping, computer maintenance, insurance cover contracts, sale of cricket world cup tickets, advertisement contracts. Based on the nature of asset, time and conditions of realization, the amount will be recognized as account receivable.
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