Mortgage Loan: Receivable
Managing receivables is basic in every firms cash flow as it is the amount expected to be received from customers for products or sets provided (net realizable value). Receivables are classified as current or noncurrent assets. These transactions are recorded on the balance sheet. Current receivables are cash and other assets a company expects to receive from customers and use up in one year or as per operating cycle, whichever is longer. Accounts receivables are either collected as bad debt or cash discount. Noncurrent assets are long-term, meaning they are held by the company longer than a year. except the well known noncurrent assets, edges and other mortgage lending institutions have a mortgage receivable account that is reported as a noncurrent asset.
Bad debts also known as uncollectable expense is considered as a contra asset (subtracted from an asset in the balance sheet). Contra asset increases with credit entries and decreases with debit entries and will have a credit balance. Bad debt is an expense account that represents accounts receivables that are not expected to be collected by a company. Cash discount is offered to a customer to entice prompt payment. When a customer pays a bill within a stipulated time which typically is 10 days, a cash discount is offered noted as 2/10 which method that if the account is paid within 10 days the customer gets a 2 percent discount. The other credit terms offered could be n30 which method the complete amount: has to be paid within 30 days. Cash discounts are recorded in the income statement as a deduction from sales revenue.
edges and other financial institutions that provide loans experience or expect to have losses from loans they lend to customers. As the country witnessed during the credit crunch, edges issued mortgages to customers who, due to loss of jobs or other facts surrounding their circumstances at that time could not repay their mortgages. As a consequence, mortgages were defaulted causing foreclosure crisis and edges repossessing houses and losing money. For better loss recovery, edges secured accounting procedures to assist bankers to report accurate loan transactions at the end of each month or as per the banks mortgage cycle. Among those credit risk management systems, edges produced a loan loss save account and mortgage loss provisions. The mortgage lenders also have a Mortgage Receivable account (noncurrent asset). By definition, a mortgage is a loan (sum of money lent at interest) that a borrower uses to buy character such as a house, land or building and there is an agreement that the borrower will pay the loan on a monthly basis and loan installments are amortized for some stipulated years.
To record the mortgage transaction, the accountant debits mortgage receivable account and credit the cash account. By crediting cash that reduces the account balance. Should the borrower default on their mortgage, the accountant debits bad debt expense and credit mortgage receivables account. Mortgage receivables are reported as long-term assets in the balance sheet. The bad debt expense is reported in the income statement. Having a bad debt expense in the same year in which the mortgage is recognized is an application of matching rule.
To safeguard losses from defaulted mortgage loans, edges produced a loan loss save account which is a contra asset account (a deduction from an asset in the balance sheet) that represents the amount estimated to cover losses in the complete loan portfolio. The loan loss save account is reported on the balance sheet and it represents the amount of noticeable loans that are not expected to be paid back by the borrowers (an allowance for loan losses estimated by the mortgage lending financial institutions). This account is modificated every quarter based on the interest loss in both performing and nonperforming (non-accrual and restricted) mortgage loans. The loan loss provision is an expense that increases (or decreases) the loan loss save. The loan loss expense is recorded in the Income statement. It is designed to adjust the loan save so that the loan save reflects the risk of default in the loan portfolio. The methodology of estimating the loan loss save based on all loan accounts in the portfolio in my opinion, does not give a good measure of the losses that could be incurred. There is nevertheless a risk of overstating the loss or understating the loss. consequently there is nevertheless a possibility that the edges may run at a loss, and that defeat the purpose of having the loan loss save and provision. If loans were categorized and then estimated consequently, that would eliminate further loan losses.