What Are Accounts Receivable (AR) Discounted?

Accounts receivable discounted refers to the selling of unpaid outstanding invoices for a cash amount that is less than the 澳洲幸运5官方开奖结果体彩网:face value of those invoices. It is an accounting tactic that discounts the value of 澳洲幸运5官方开奖结果体彩网:accounts receivable (AR) 🉐on a company's🥂 balance sheet in return for cash balances.

Understanding Accounts Receivable Discounted

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivable are listed on the 澳洲幸运5官方开奖结果体彩网:balance sheet as a current asset. A𒈔R is any amount of money owed by customers for pu🎐rchases made on credit.

Accounts receivable discounted takes outstanding invoices that represent money owed to a creditor (such as a firm) and seeks to sell those uncollected amounts to a buyer for less than face value, typically to quickly raise capital and improve 澳洲幸运5官方开奖结果体彩网:cash flow. The buying firm—also referred to as a "factor"—purchases the financial obligations at a discounted rate providing the selling firm with immediate cash. However, the sale is often undertaken 澳洲幸运5官方开奖结果体彩网:without recourse, meaning that the factor assumes full responsibility for collecting the money owed in order to recoup its financial layout for the account. The debtor who owed the selling firm money per the receivable would direct its paymen🌱t to the factor who purchased the financial obligation.

Accounts receivable are often sold 澳洲幸运5官方开奖结果体彩网:at a discount in order to mitigate the risk that the debtor will not satisfy the obligation. The discount arises because the factor assumes the underlying risk of the receivable🐻s and must be compensated for the delayed inflow of funds.

Previously, only large firms that could meet minimum threshold requirements could enter into a relationship with a factoring firm (typically a large bank) to sell their receivables and obtain much-needed cash, and often with recourse. Today, medium- and small-sized firms operating in virtually all industries (i.e., IT firms, manufacturers, even hospitals) can find ways to sell their ARs for a discounted rate to individual factoring firms or through factoring broker intermediaries.

Allowance for Doubtful Accounts

Some debts owed to a firm that is listed as accounts receivable cannot be sold or will not be paid back in part or in full. Under U.S. general💙ly accepted accounting principles (GAAP), expenses must be recognized in the same accounting period that the related revenue is earned, rather than when payment is made. Therefore, companies must estimate a dollar amount for uncollectible account𝄹s using the allowance method.

This estimate for bad debt losses is recorded as both a 澳洲幸运5官方开奖结果体彩网:bad debt expense on the income statement and displayed in a 澳洲幸运5官方开奖结果体彩网:contra account below accounts receivable on the balance sheet. This account is often called the 澳洲幸运5官方开奖结果体彩网:allowance for doubtful accounts.

The net of accounts receivable and the allowance for doubtful accounts display the reduced value of accounts receivable that are expected to be collectible. Investors should consider these values as they review a company's 澳洲幸运5官方开奖结果体彩网:accounts rec🌃eivable on the balance sheet.

Businesses retain the right to collect funds♛ even if they are in the allowance account. This allowance can accumulate across accounting 🍒periods and will be adjusted periodically based on the balance in the account and receivables outstanding that are expected to be uncollectible.