These are amounts owed to the company through debtors. This is the purpose why we also utilize the term sundry debtors to indicate the amounts owed to the firm. This signifies amounts generally arising out of normal commercial transactions. Or we can say, 'accounts receivable' or sundry debtors represent unpaid customer accounts. Inside the balance sheet explanations these represent amounts owed to the firm through customers on the balance sheet date. Such are also called as trade receivables, as they arise out of normal trading transactions. Trade receivables occur directly from credit sales and as provide significant information for management and outsiders. In most conditions these accounts are unsecured and contain only the personal security of the customer.
This is normal that several of these accounts default and turn into uncollectable. These collection losses are termed as bad debts. This is impossible for the management to identify exactly that accounts and what amount will not be collected. But, depends on past experience, this is possible for the management to estimate the loss on the sundry or receivable debtors like a whole. Such estimates decrease the gross value of accounts receivable to their estimated realizable value. For illustration:
Accounts Receivable 7,50,000
Less: Estimated collection loss at 10% 75,000
Net realisable value of accounts receivable 6,75,000
The estimated collection loss is variously considered to as provision for uncertain debts, provision for bad provision or debts for collection losses.
This is a usual practice for debts to be evidenced by formal written promises to pay or acceptance of an order to pay. Such formal documentary debts represent Promissory Notes, Receivable or Bills Receivable. Such instruments used in trade are negotiable instruments and therefore allow the trader to assign any of his or her receivables to the other party or a bank for realizing immediate liquidity.
This is also usual for accounts receivables to be pledged or assigned mainly to banks against short-term credits in the type of cash credits or overdrafts.