Accounts receivable balances are the ones the company has against its clients. These balances are receivable from sales of goods or services. On the balance sheet they are recognized under assets and as such are subject to valuation assessment as frequently as needed.

All the assets need to be recognized essentially at their fair value meaning most often the market value. In the case of receivables, one needs to assess if the amount recorded in the books is indeed collectable. I know it sounds simple, but estimating it is not something that is easily grasped. In normal situation the clients pay the invoices in their due time meaning at the ‘payment date’. On the contrary, depending on the situation, there also may be clients that are unable or unwilling to pay their debt in due time thus creating doubt whether the receivables are in fact collectable or should be written down.

Now, for the company that has transactions with such clients, the first indication of a problem is an overdue receivable balance. If it’s for the first time, then it is wise to simply contact the client as they may be missing the invoice or the payment date has been incorrectly entered into accounting. It happens and more often than you would think. However, if it happens more than once, this may be an indication of poor payment discipline. What definitely is an indication of such is simple overrun of payment dates with no apparent reason.

I consider those situations to be more on the ‘soft’ side of the assessment as they are connected to accounting department capabilities and working discipline. However, what are definite indications and should be considered carefully, are any adverse news, disclosures of inability to pay taxes to government, bad financial position from the looks of financial statements etc. Anything that gives the management a more definite hint that this client may be unable to pay up its debt, should be already taken into account prior to commencing transactions with. But when this is an ideal world, those indications need to be considered at the balance sheet date.
At the balance sheet date the receivable balances need to be recognized at the amount they are reasonably to be believed to be collected. Every individual balance should be assessed and all conditions carefully considered. If there is some doubt, it’s probable that only some or maybe none of the balance is collectable. When such estimation is reached, the balance needs to be written down to the amount it’s considered to be collected. Thus in the accounting the ‘provision for doubtful receivables’ is created. Why is there a ‘provision’? Because the management is uncertain of the collectability and it may very well be that some if not all is afterwards still collected. In the case where the management has a strong reason to believe that this balance is not collectable at all, it’s not written down but removed from the balance sheet in full.

Today more than in the middle of the financial year all company managers need to assess the collectability of their receivable balances.