These are two very simplistic examples that are meant to demonstrate a concept. In practice, particularly for commercial enterprises, revenue (and receivable) recognition issues can be quite complex and have been the cause of more than one accounting scandal in recent years.

Another key point to understand about the accounting for these types of accounts receivable is that not all receivables are necessarily collected. This is particularly true of the types of non-tax-related receivables where the government does not have the ability to place a lien on a property to ultimately collect its receivable. Generally accepted accounting principles require that an estimate of receivables that will not be collected be made and that an “allowance for uncollectible receivables” be established. This account reduces the overall receivable balance (and charges bad debt expense) so that the net of the gross receivable balance
and the allowance represents the best estimate of how much of the receivable balance actually will be collected. Receivables are therefore reported at the net realizable value, which is in accordance with GAAP. Note that the government does not really know which specific receivables (i.e., which students will not pay their tuition bills), but will use historical trends and an aging of receivables (which categorizes how long receivables have been outstanding) to estimate this amount. If the government knows that a particular receivable will not be collected, that particular receivable should be reduced from the gross receivable balance, which is another way of saying that the particular receivable should be written off.

Taken From : Governmental Accounting Made Easy

This entry was posted on Wednesday, January 21st, 2009 at 6:19 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.