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Accounts receivable (A/R) represent the amounts to be paid from customers for goods or services provided. A/Rs are crucial to consider in a sole proprietorship because such a business is owned and incorporated by one individual. Sole proprietors (SP) usually create accounts receivable when they mail invoices to their customers, with A/Rs being listed on balance sheets as current or short-term assets (LaMarco, 2019). As to the effect on business, even though they appear on balance sheets as assets, A/Rs can adversely affect the cash flow of sole proprietors. In order to provide products and services to customers, SPs are required to pay costs for labor and inventory, and if they are not paid in time, business owners may find themselves short on money. Consequently, the net worth of a sole proprietorship may look acceptable ‘on paper,’ nevertheless, it is still possible to run into difficulties associated with covering the everyday expenses of organizations.
For sole proprietors, it is essential to consider the impact of uncollectible accounts on business. Accounts become past due if companies fail to pay them in time, and if they are not paid for long periods of time, the accounts become uncollectible (Kenton, 2021). If accounts become uncollectible, it means that they are no longer considered assets to businesses, and business owners must record that in financial statements for reasons of transparency and responsibility. Accounts uncollectible may offer a significant amount of insight into the lending practices of a company and its clients. For instance, if an SP notices that the accounts uncollectible are either increasing or remain in the same spot, it is extending credit to risky customers and, therefore, should implement effective measures of vetting to avoid working with such clients in the future.
References
Kenton, W. (2021). Accounts uncollectible. Web.
LaMarco, N. (2019). The accounting methods for sole proprietorship and cash accrual. Web.
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