Why Are Ethics Important In Account Receivables

According to the principles of accounting course, accounts receivable occurs when a customer purchases goods or services and promises to pay for them in the future. This helps consumers receive goods when they may not have the funds to purchase them, creating an account receivable, or when they cannot afford the whole amount upfront and want to make payments they create a note receivable, which usually accrues interest. When it comes to the business side, granting credit helps increase sales, but it could also lead to a write-off because a customer did not pay. Furthermore, this is why ethics plays an important role by the creditor and the debtor. According to my accounting course, ethics is “a code of conduct or set of beliefs that dictate what is right, wrong, fair, and unfair” (Ethics - Definition | Meaning | Example, n.d.). In addition, these codes and beliefs need to be applied equally. It is important to understand why ethics is so important in receivables and what could happen when it is not applied properly …show more content…
For example, Congress passed the Sarbanes-Oxley Act that requires companies to look over their internal control and to take responsibility for their financial reports (Nobles, Mattison, Matsumura, & Horngren, 2014, p. 375). When it comes to the business side of receivables, businesses need to have solid internal control procedures, which may include: separation of duties, assigning responsibilities, and audits to make sure everyone is being ethical and not circumventing laws. For example, if a business understated bad debt or fails to make a reasonable estimate of uncollectible receivables, it will overstate net income and its accrual for bad debt will be understated. Consequently, this could mislead a bank to thinking the business has more cash or expects more cash than it will end up