Receivables management is fundamental to any company’s cash flow, as it is the amount expected to be received from customers for products or services delivered (net realizable value). Receivables are classified as current or non-current assets. These transactions are recognized in the balance sheet. Current receivables are cash and other assets that a company expects to receive from customers and is used up for one year or per year. Operating cycle, whichever is longer. Accounts receivable are collected either as bad debt or cash discount. Long-term assets are long-term, which means they are owned by the company for more than a year. Apart from the well-known one-off assets, banks and other mortgage banks have a receivables account that is reported as a non-current asset.
Bad debt, also known as uncollectible expense, is considered a contra-asset (deducted from an asset in the balance sheet). The contract increases with credit records and decreases with debit items and will have a credit balance. Debt is an expense account that represents accounts receivable that is not expected to be collected by a company. A cash discount is offered to a customer to entice for quick payment. When a customer pays a bill within a certain period of time that is usually 10 days, a cash discount is offered as 2/10, which means that if the account is paid within 10 days, the customer receives a 2 percent discount. The other credit terms offered can be n30, which means the full amount: payable within 30 days. Cash discounts are recognized in the income statement as a deduction from sales revenue.
Banks and other financial institutions that provide loans are experiencing or expect to have losses from loans they lend to clients. As the country witnessed during the credit crunch, banks issued mortgages to customers who, due to job losses or other facts surrounding their circumstances, were unable to repay their mortgage loans at that time. As a result, mortgages were defaulted, leading to foreclosure crisis and banks taking over homes and losing money. For better recovery of losses, banks secured accounting procedures to help bankers report accurate loan transactions at the end of each month or according to the bank’s mortgage loan. Among these credit risk management systems, banks created a reserve loss account and provisions for mortgage losses. Mortgage providers also have a mortgage loan account (one-time asset). Pr. By definition, a mortgage is a loan (the sum of the loan interest) that a borrower uses to buy property, such as a house, land or building, and there is an agreement that the borrower must pay the loan monthly and the loan repayment is written off for some years.
To record the mortgage loan transaction, the accountant debits a receivable account and credits the cash account. By crediting cash that reduces the account balance. If the borrower defaults on their mortgage loan, the accountant will debit bad debt expenses and the credit loan receivables. Mortgages on mortgage loans are recognized as long-term assets in the balance sheet. Expense debt is recognized in the income statement. Having a bad debt expense in the same year that the mortgage is recognized is an application of a matching principle.
To protect losses from non-performing mortgages, banks created a loan loss reserve account, a contract capital account (a deduction from an asset in the balance sheet) that represents the amount estimated to cover losses in the entire loan portfolio. The loan loss account is recognized in the balance sheet and represents the amount of outstanding loans that are not expected to be repaid by the borrowers (an allowance for loan losses estimated by the financial institutions’ mortgage institutions). This account is adjusted quarterly based on the interest rate loss on both performing and non-performing (non-accrued and restricted) mortgages. The loan loss provision is an expense that increases (or decreases) the reserve for loss losses. Loan loss costs are recognized in the income statement. It is designed to adjust the loan reserve so that the loan reserve reflects the risk of default in the loan portfolio. In my opinion, the method of calculating the loss on reserves based on all loan accounts in the portfolio is not a good measure of the losses that may occur. There is still a risk of exaggerating the loss or underestimating the loss. Therefore, there is still a possibility for banks to run at a loss and to defeat the purpose of having losses and reserve on the provision. If loans were categorized and then estimated accordingly, it would eliminate further loan losses.