Accounts receivable, or debtors, are recorded as an asset on the company balance sheet on the basis that they represent funds that will be paid to the company by customers in the normal course of business.
That’s fine if the amount recorded is accurate and properly reflects the anticipated level of income but, if it isn’t accurate, it inflates the level of current assets and may be disguising the true financial position of the company and becomes a potential liability for the company’s directors.
In a recent liquidation, the accounts receivable figure for the company, at the date of liquidation, was approximately $155,000 however, when the process of collecting the outstanding amounts was started, it was quickly discovered that the amount outstanding was markedly different to the amount that was likely to be realised.
Many of the outstanding amounts were disputed for various reasons. Some of the debts were 6 years old or more and many more were 3 to 5 years old.
The process of collection is on-going but, to date, only 14% of the total has been recovered and over 50% has been written off as uncollectable. The balance is still to be decided but appears more likely to be written off than collected.
This is a case where a proper review of the accounts receivable had not been carried out and uncollectable debts had not been written off.
Management of the accounts receivable needs to be an on-going process –
• dealing with disputes as they arise;
• making pragmatic decisions about whether or not to pursue an unpaid debt through Court proceedings; and
• writing debts off when they fall into the uncollectable category.
If unrealistically high values are attributed to company assets, including accounts receivable, it could be the difference between a company being solvent or insolvent and this could leave the directors vulnerable to claims that they were trading whilst insolvent.