Uncollectible Accounts and Accounts Receivable Turnover

560 words | 2 page(s)

Dayton Logistics Solutions provides its customers with transportation and logistics services. It is based in Dayton, Ohio, and provides its services within the state. The company’s accounts receivable management revolves around three key areas, which are accessing credit-worthiness before it grants credit to customers, sustainability of credit terms once it decides to give credit to customers, and the final collection of cash from credit customers (Parrott, 2016). The company uses bank references, trade references, financial statements, and credit references to determine the credit-worthiness of potential credit customers. The determination of the creditworthiness of clients helps reduce the risks of bad debts. Once the company extends credit, it sets and explains credit terms to its clients. Such conditions include the standard credit period granted, discounts offered for earlier payments, and interest charged on late payment. The company prepares accounts receivables aged analysis report, and credit utilization reports to help monitor its credit accounts. The final collection of cash from customers involves the billing, cash application, and the actual collection processes. The company has automated its billing process to ensure that invoicing errors such as incorrect units of measure, price, and customer accounts do not occur (Deloitte LLP, n. d.). The automation also helps ensure that payments are applied to their accurate customer accounts and invoices. The actual cash collection involves ensuring that the clients pay up promptly. The company’s credit control department calls customers, writes them, and personally approaches them to make sure that they pay up their debts.

Sometimes, the company’s receivables become uncollectible, and it writes them off. It uses the aging accounts receivable method to write off its bad debts. Albrecht, Stice, & Stice (2007), consider the method as the most accurate of all in estimating a company’s uncollectible accounts. They also state that it helps the companies identify their problem customers as monitor and age credit accounts individually.

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The company uses factoring and early settlement discounts to encourage credit customers to pay their bills on time. In factoring, the company receives an advance from a third party, referred to as a factor, against its receivables. It also delegates the task of following up with credit customers to the factor. Under the early settlement discounts method, the company provides discounts to credit customers who pay up their accounts before the end of the regular credit period granted.

Albrecht, Stice, & Stice (2007) define accounts receivable turnover ratio is a performance ratio that measures the number of times during the year that a company collects its receivables. It is computed by dividing the sales revenue by the average accounts receivable. Dayton Logistics Solutions manages its accounts receivable turnover by ensuring that most of its sales are in cash terms. Additionally, it grants short credit periods to its customers to make sure that they pay up as quickly as possible. Its credit department follows up with the customers to encourage them to pay up promptly.

  • Albrecht, W., Stice, E., & Stice, J. (2007). Financial Accounting (10th ed., pp. 237-245). Mason: OH: Cengage Learning.
  • Deloitte LLP,. Make your working capital work for you Strategies for optimizing your accounts receivable (1st ed.). Retrieved from http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/finance/ca-en-FA-strategies-for-optimizing-your-accounts-receivable.pdf
  • Parrott, W. (2016). Accounts Receivable Management | ACCA Qualification | Students | ACCA Global.
  • Accaglobal.com. Retrieved 24 October 2016, from http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/arm.html

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