Accounts receivable (AR) is defined as a claim against a debtor, such as a person, business, or governmental entity for money owed to the state .  An invoice or other document requesting payment will be prepared (Nicolai, 2009).  The invoice shall be sent to the debtor as soon as practical and within 30 days after the event giving rise to the AR.

Normally, departments must perform an analysis on their accounts receivables to verify the correct amounts are recorded (Nandakumar, 2009).  It is ethically right to reclassify or adjust accounts receivables in certain cases as listed below:

  • When legal authority does not exist to bill for the amount owed.
  • When sufficient documentation does not exist to substantiate the accounts receivable (e.g., debtor name and an invoice or other document identifying the amount owed).
  • When validity or amount of the accounts receivable is disputed. 

From the amounts given, Net Cash without reclassification is $60,000. After reclassification, there is an increase of operational income of $80,000. Therefore, the net income after reclassification is $140, 000 i.e. ($60,000+ $80,000= $140,000). Of course, the reporting after reclassification makes Moss Company look better in terms of net income. However,

According to Bhattacharyya, (2006) the case given above is ethical based on the fact that it follows the case when sufficient documentation does not exist to substantiate the accounts receivable (i.e., debtor name and an invoice or other document identifying the amount owed). There is a general feeling that reclassifying account receivables is normally unethical simply because it is often biased. However, my opinion is that this case is justified because as at the moment, sufficient documentation does not exist to substantiate the accounts receivable.

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