Mortgage Loan: Accounts Receivable

The management of receivables and accounts receivables is crucial to the flow of cash for every business because it represents the amount that is expected to be paid by customers for services or products (net real value). Receivables are classified as either current and non-current capital assets. These transactions are reported in the balance sheet. Current accounts receivables are money and assets the business anticipates receiving from its customers and utilize within a year or in accordance with its operating cycles, which is the longer. The receivables are either repaid in the form of bad debts or cash discount. Non-current assets are considered to be long-term, which means they’re held in the business for a period of more than one year. Alongside the well-known non-current assets banks and mortgage lenders also have a receivable account which is categorized as non-current assets.

The bad debts, also referred to in the field of “bad expenses” are categorized as an asset that is a contra asset (subtracted from the asset in the balance sheet). Contra assets rise when credit entries are made and decreases when debit entries are made and has the credit balance. The term “bad debt” refers to an expense account that is used to represent receivables from which the business isn’t expected to pay. Cash discounts are offered to the customer in exchange for timely payment. If the client pays the invoice within the stipulated period, which is typically 10-days, then a discount is provided, marked as 2/10. This means that when the bill is settled in 10 days or less, the client receives a discount of 2 percent. Other loan terms could be n30. This means the entire amount must be paid in 30 days. Cash discounts are reported on your income statements as a deducted amount from sales revenues.

Financial institutions and banks who offer loans are either experiencing or anticipate losses on the loans they loan to their customers. The country was witness to this during the crisis in credit the banks offered mortgage loans to those who, because of the loss of their jobs or other factors did not have the funds to pay back them on time. In the end, mortgages were defaulted, resulting in the foreclosure crisis, with banks taking possession of homes and loosing funds. To help cover the expenses, lenders have offered accounting processes to aid banks report on loan transactions in a timely manner at the close of each month, or as per the mortgage cycle of the bank. Within the credit risk management methods banks have set up accounts for loan losses along with mortgage loss reserves. The mortgage lender also has a mortgage account payable (non-current assets) account. According to the definition, a mortgage is a type of loan (an quantity of funds lent at interest) that is used by the borrower to buy property, like a home or land or other property, and there is an agreement between the borrower and lender that states that the latter is required to repay the loan every month by installments, amortized over the specified years.

In order to record the mortgage transaction to record the mortgage transaction, the accounting professional debits the mortgage receivables bank account and credits the account for cash. Crediting cash decreases the balance of the account. If the borrower defaults on their mortgage then the accountant debits the bad debt expense and mortgage accounts receivables. Mortgage receivables are listed in the balance sheets as assets that are long-term. The expense for bad debt is reported in the statement of income. Being able to show a negative debt expense within the same year the mortgage is recognised is an example of applying an underlying principle called matching.

To safeguard against losses resulting from the default of mortgage loan, lenders have set up an account for loan loss reserves as a contra assets account (subtracted from assets in the balance sheet) which is that is calculated to protect losses on the entire portfolio of loans. The account for loan loss allowances appears as a balance sheet. It is the outstanding loans that aren’t anticipated to be repaid by the borrower (loan loss allowance is estimated from mortgage finance institutions). The account is adjusted every quarter in accordance with the interest loss on non-performing and performing (non-accrual as well as limited) home loans. A provision for loss on loans will be an expenditure that raises (or reduces) the amount of loss on loans. The loss is recorded on the statement of income. The purpose of this is to adjust the credit provision to ensure that it is reflected in the risk of default within the portfolio of loans. An estimation of the loan loss allowance technique that is based on all loans in a portfolio will not seem to give a precise measure of the potential losses that could be caused. There is a chance of underestimating or overestimating the amount of losses. So, there’s chance that banks will be operating at a loss, which would be in violation of the goals of building provisions as well as provision for loan losses. If the loans are assessed and classified accordingly it will prevent additional loan losses.