Accounts Receivable and Mortgage Loss Provisions Within Banks

Accounts Receivables are an important item on the balance sheet; it is classified under the current assets portion on the balance sheet. Accounts Receivables are money owed by customers to another business in exchange for goods or services that have been delivered or used but not yet paid for. Accounts Receivables are usually of short term in nature, usually due within a year. They are reported at net realizable value which is the amount expected to be received to the firm by customers in settlement of their obligations. The best way to account for bad debts is by matching receivables.
Matching receivables is essential to a bank or any company's cash flow. Matching receivables is a significant practice in accrual accounting. The way that matching receivables works is by taking the current asset category accounts receivable and apply the matching principle to give a reasonable explanation of a bank's financial condition. Accounts receivable represents the total amount that is due to the bank by its customers. Customers have purchased a product or service (mortgage) on credit and have agreed to pay an amount within a set period of time. Accounts receivable are reported at net realizable value, which is the amount that the business (bank) expects to receive from customers to settle their obligations. Due to the actuality of business, banks know that some amount of their accounts receivable will not be able to be recovered and will become bad debts. Banks know which customers will be able to pay their debts but they know that some will not be able their loans. Understanding this scenario, banks use the matching principle to their financial records to present a more accurate depiction of their financial state of affairs.
The matching principle, which is the underpinning of accrual accounting, says that expenses acquired in generating revenue should be deducted from that revenue earned during the same period. Applying the matching principle to the accounts receivable, enables businesses to gauge what percentage of their accounts receivables they may not receive and deduct before they actually receive or not receive the amounts owed by their customers. The matching principle is done to make certain that the bank's finances are done accurately.
With the recession that has just hit and the bursting of the housing bubble words like loan loss reserves, mortgage loss provisions, bad debts expense and write offs have occur when firms or individuals relate to financial statements. Mortgage loss provisions have become a major topic with the burst of the housing bubble. Many banks have been stuck with bad loans in which customers are unable to pay the loans back to the bank or mortgage lender. The term mortgage loss provision is an expense set aside as an allowance for bad loans which have resulted in customer defaults or loans that have been renegotiated to keep customers from defaulting. Mortgage loss provisions have been criticized by investors, analyst and politicians to name a few because they feel that the estimates made by the bank or financial institution are not sufficient and help banks inflate their earnings. Analysts have had to really do their homework and not take shortcuts when analyzing banks or mortgage lenders when looking at their credit picture.