Accounts Receivable (A/R) Discounted Details

Accounts Receivable (A/R) Discounted is an accounting tactic or a transaction tool that the business generally employs to raise quick cash for the company and reduces the risk of debtors who fail to adhere to their side of the bargain. The factor is the person buying the Accounts Receivable discounted.

Accounts receivable (A/R) is the number of funds owed to the customers' business for products sold on credit. The balance owed from the goods or services already delivered to the customer is then listed as a current asset on the balance sheet.

The accounts receivable discounted takes the outstanding invoices not cleared by the creditor (such as a company, organization, or a large manufacturing firm) and seeks to sell these uncollected amounts at a lower value factor than the face value to raise capital and improve cash flow.

Example of Accounts Receivable (A/R) Discounted

Company A agrees to sell $700,000 worth of its product to Customer Z on net 70 terms, meaning this customer has 70 days to clear their dues. On the point of sale, the accounting is as follows: Company A records the $700,000 as revenue to be received, and it debits its accounts receivable account. When the sale is made, rather than when the cash is received, a $700,000 credit is made to the balance sheet's revenue account, which balances the entry.

When the customer pays within the 70 days allotted, Company A reclassifies the $700,000 as cash on its balance sheet by crediting the accounts receivable account and debiting the cash account. However, accounts receivables are not guaranteed to turn into cash. For several reasons, customers may neglect to pay the money they owe at times.

From the example above, suppose that Customer Y went bankrupt after purchasing from Company A before paying the bill, or maybe they became non-operational due to poor leadership. Even though the customer has a legal responsibility to pay, they cannot do so if they don't have the required funds. Receivables whose collection is unexpected are normally moved to a contra-asset account on the balance sheet known as an allowance for doubtful accounts instead of reclassified as cash.

Accounts Receivable vs. Notes Receivables

While accounts receivable is the amount owed to the firm for regular credit purchases, Notes Receivable includes a promissory note to be signed to acknowledge the debts.

A Promissory Note is a business financial instrument, which contains a written promise by one party (the note's issuer) to pay another party (note's payee) a particular sum of money, either on-demand or at a specific future date. A Promissory note strengthens a company's legal claim against those who fail to pay as promised.

The maturity date determines its placement in either the current assets or long-term assets on the balance sheet. Due in one year or less, notes are current investments, while notes expected to be due in more than one year are considered long-term assets. Accounts receivable and notes receivable that result from company sales are called trade receivables.