Mortgage Loan: Eligible
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Mortgage Loan: Eligible

The management of accounts receivable is essential in the cash flow of any company, since it is the amount that is expected to be received from customers for the products or services provided (net realizable value). Accounts receivable are classified as current or non-current assets. These transactions are recorded on the balance sheet. Current accounts receivable are cash and other assets that a business expects to receive from customers and use in one year or based on the operating cycle, whichever is longer. Accounts receivable are collected as bad debt or as a discount for prompt payment. Non-current assets are long-term, which means that the company holds them for more than one year. Aside from the well-known non-current assets, banks and other mortgage lenders have a mortgage receivable that is reported as a non-current asset.

Bad debts, also known as bad expenses, are considered a contra asset (subtracted from an asset on the balance sheet). The asset against increases with credit entries and decreases with debit entries and will have a credit balance. Bad debt is an expense account that represents accounts receivable that a business is not expected to collect. The prompt payment discount is offered to a customer to encourage prompt payment. When a customer pays an invoice within a stipulated time, which is normally 10 days, a prompt payment discount is offered, indicated as 2/10, which means 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 means the full amount: must be paid within 30 days. Prompt payment discounts are recorded on the income statement as a deduction from sales revenue.

Banks and other financial institutions that provide lending expertise or expect to incur losses on the loans they make to customers. As the country witnessed during the credit crisis, banks issued mortgages to customers who, due to job losses or other events related to their circumstances at the time, were unable to pay their mortgages. As a result, mortgages were defaulted causing a foreclosure crisis and banks foreclosed on houses and lost money. For better loss recovery, banks secured accounting procedures to help bankers report accurate loan transactions at the end of each month or according to the bank’s mortgage cycle. Among those credit risk management systems, banks created a reserve account for credit losses and provisions for mortgage losses. Mortgage lenders also have a Mortgage Credit account (non-current asset). By definition, a mortgage is a loan (slow sum of money at interest) that a borrower uses to buy a property such as a house, land or a building and there is an agreement that the borrower will repay the loan monthly and in installments. They are amortized over a stipulated number of years.

To record the mortgage transaction, the accountant debits the mortgage receivable account and credits the cash account. Crediting cash that reduces the account balance. If the borrower defaults on their mortgage, the accountant debits the bad debt expense and credit mortgage accounts receivable account. Mortgage receivables are reported as long-term assets on the balance sheet. Bad debt expense is reported in the income statement. Having an insolvency expense in the same year in which the mortgage is recognized is an application of the matching principle.

To safeguard losses from delinquent mortgage loans, banks created a loan loss reserve account which is a contra asset account (a deduction from an asset on the balance sheet) that represents the estimated amount to cover losses on the entire portfolio. of loans. The reserve account for credit losses is reported on the balance sheet and represents the amount of outstanding loans that borrowers are not expected to repay (a provision for credit losses estimated by mortgage lending financial institutions). This account is adjusted quarterly based on interest loss on mortgage loans both current and past due (unearned and restricted). The provision for bad loans is an expense that increases (or decreases) the reserve for bad loans. The bad debt expense is recorded in the Profit and Loss Account. It is designed to adjust the loan reserve so that the loan reserve reflects the risk of default in the loan portfolio. In my opinion, the loan loss reserve estimation methodology based on all loan accounts in the portfolio does not give a good measure of the losses that could be incurred. There is still the risk of overstating the loss or understating the loss. Therefore, there is still the possibility that banks will operate at a loss, and that defeats the purpose of having the reserve and provision for credit losses. If loans were categorized and then estimated accordingly, more credit losses would be eliminated.

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