True or false longer an account receivable has been outstanding. The less likely it is to be collected.
The correct answer and explanation is:
Correct Answer: True
Explanation:
The statement “The longer an account receivable has been outstanding, the less likely it is to be collected” is true. This principle is a fundamental concept in accounting and financial management, particularly in the area of credit and collections.
Why is it True?
- Aging of Accounts Receivable:
- Businesses often use an aging schedule to track accounts receivable by how long they have been outstanding—usually grouped as 0–30 days, 31–60 days, 61–90 days, and over 90 days.
- The longer a receivable remains unpaid, the higher the probability that the customer may have forgotten, disputed, or is unable to pay due to financial issues.
- Risk of Default Increases with Time:
- As time passes, the likelihood that the customer will face financial hardship, go out of business, or become unresponsive increases.
- This risk means the debt becomes harder to collect and is often considered doubtful or bad debt.
- Allowance for Doubtful Accounts:
- In accrual accounting, companies estimate and account for uncollectible accounts using an allowance for doubtful accounts.
- The longer the account is outstanding, the more likely it is included in this allowance, reflecting its reduced collectability.
- Collection Efforts and Costs:
- Collecting old debts usually requires more time, effort, and expense, including letters, calls, or even legal action.
- These efforts may not always result in successful collection, further reducing the effective value of older receivables.
Conclusion:
Timely collection of receivables is crucial for maintaining cash flow and financial health. The longer a receivable goes unpaid, the lower the chance of eventual payment, which is why businesses prioritize collecting recent accounts and closely monitor overdue ones.