Chapter 8

Receivables
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

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 Objectives
Objectives
1. List the common classifications of receivables.
2. Summarize and provide
After examples
studying thisof internal control
After studying this
procedures that apply to receivables.
chapter,
chapter,
3. Describe the nature you
you
of and should
theshould
accounting for
be
be able
able to:
uncollectible receivables. to:
4. Journalize the entries for the allowance method of
accounting for uncollectibles, and estimate
uncollectible receivables based on sales and on an
analysis of receivables.
 Objectives
Objectives
5. Journalize the entries for the direct write-off
of uncollectible receivables.
6. Describe the nature and characteristics of
promissory notes.
7. Journalize the entries for notes receivable
transactions.
8. Prepare the Current Assets presentation of
receivables on the balance sheet.
9. Compute and interpret the accounts
receivable turnover and the number of days’
sales in receivables.
Classification of Receivables
 Accounts Receivable—used for selling
merchandise or services on credit, and normally
expected to be collected in a relatively short
period.
 Notes Receivable—used to grant credit on the
basis of a formal instrument of credit, called a
promissory note.
 Other Receivables—include interest receivable,
taxes receivable, and receivables from officers
and employees.
 Separating
Separating the
the Receivable
Receivable Functions
Functions

Credit
Credit Info.
Approval

Collections
Goods
or Acctg.
services Invoice Info

Sales Acctg.
Info.
Accounting
Uncollectible
Uncollectible Receivables
Receivables

Companies
Companies often often sell
sell
their
their receivables
receivables to to other
other
companies.
companies. This This
transaction
transaction isis called
called
factoring
factoring thethe
receivables,
receivables, and and the
the
buyer
buyer of of the
the receivables
receivables
isis called
called aa factor.
factor.
 Uncollectible
Uncollectible Receivables
Receivables
The
The Allowance
Allowance Method
Method
 This method is consistent with the matching principle.
 Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
 Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
 Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
 The
The Allowance
Allowance Method
Method
On
On December
December 31, 31, Cynthia
Cynthia Richards
Richards estimates
estimates
that
that aa total
total of
of $4,000
$4,000 of
of the
the $105,000
$105,000 balance
balance in
in
her
her company’s
company’s Accounts
Accounts Receivable
Receivable will
will
eventually
eventually be
be uncollectible.
uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 4 000 00
Allowance for Doubtful Accounts 4 000 00
 The
The Allowance
Allowance Method
Method
The
The net
net amount
amount that
that isis
expected
expected to to be
be collected,
collected,
$101,000
$101,000 ($105,000
($105,000 ––
$4,000),
$4,000), isis called
called the
the net
net
realizable
realizable value
value (NRV).
(NRV).
The
The adjusting
adjusting entry
entry
reduces
reduces receivables
receivables to
to
the
the NRV
NRV andand matches
matches
uncollectible
uncollectible expenses
expenses
with
with revenues.
revenues.
 The
The Allowance
Allowance Method
Method
The
The
Adjusting
Entry adjusting
adjusting
entry
entry fills
fills
the
the bucket.
bucket.
Allowance
for
Doubtful
Accounts
 The
The Allowance
Allowance Method
Method

Writing
Writing off
off
accounts
accounts
Al fo TFU s
lo r
DO co

wa

empties
empties the
the
ac
UB un

nc
e

bucket.
bucket.
L
t
 The
The Allowance
Allowance Method
Method

Jan. 21 Allowance for Doubtful Accounts 610 00

Accounts Receivable—John Parker 610 00
To write off the uncollectible
account.

On
On January
January 21,
21, John
John
Parker’s
Parker’s account
account totaling
totaling
$610
$610 isis considered
considered toto be
be
uncollectible.
uncollectible.
 The
The Allowance
Allowance Method
Method

Jun. 10 Accounts Receivable—John Parker 610 00

Allowance for Doubtful Accounts 610 00
To reinstate the account
written off on Jan. 21.

An
Onentry
On
An Juneis
June
entry 10,
is
10,made
the
made to
to reinstate
the written-off
reinstate
written-off
John
John Parker’s
account
Parker’s
account account.
isis collected.
account.
collected.
 The
The Allowance
Allowance Method
Method

Jun. 10 Cash 610 00

Accounts Receivable—John Parker 610 00
To record collection on
account.

A
A second
second entry
entry isis made
made to
to
record
record receipt
receipt of
of the
the cash.
cash.
 The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
Uncollectible Accounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and
it is estimated that 1% will be uncollectible,
the Uncollectible Accounts Expense is $3,000.
 The
The Allowance
Allowance Method
Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 3 000 00
Allowance for Doubtful Accounts 3 000 00

Based
Based on
on aa Percentage
Percentage of
of Sales
Sales
 The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
Uncollectible Accounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables will be
uncollectible and the Allowance for Uncollectible
Accounts currently has a balance of $510, the
Uncollectible Accounts Expense must be debited for
$2,880 ($3,390 – $510).
 The
The Allowance
Allowance Method
Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00

Based
Based on
on an
an Analysis
Analysis of
of Receivables
Receivables
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Total
Total accounts
accounts receivable
receivable
shown
shown by
by age.
age.
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

Uncollectible percentages based on

experience and industry averages.
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

AMOUNT $3,390 = $1,500 $200 $310 $380 $360 $400 $240

 Year-End
Year-End Adjustment
Adjustment for
for Uncollectibles
Uncollectibles
General Ledger Balance Sheet
Accounts Receivable
Accounts receivable $86,300
A 86,300 Less allowance for
doubtful accounts 3,390 C
Allowance for Doubtful Accts.
Net realizable value $82,910
510 A
2,880 B
A Balances before adjustment
3,390 C

B Year-end adjustment:
Uncollectible Accts. Expense
B 2,880 $3,390 – $510 = $2,880

C Balance after adjustment

Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
 This method is not consistent with the matching principle.
 Accounts that prove to be uncollectible are written off in the year
they become worthless.
 Uncollectible Accounts Expense is debited and Accounts
Receivable is credited for each such transaction.
 The
The Direct
Direct Write-Off
Write-Off Method
Method
May 10 Uncollectible Accounts Expense 420 00
Accounts Receivable—D. L. Ross 420 00
To write off an uncollectible
account.

On
On May
May 10,
10, D.
D. L. L. Ross’
Ross’ account
account was
was
determined
determined to
to bebe uncollectible.
uncollectible. The
The
$420
$420 balance
balance isis written
written off
off the
the books.
books.
 The
The Direct
Direct Write-Off
Write-Off Method
Method
Nov. 1 Accounts Receivable—D. L. Ross 420 00
Uncollectible Accounts Expense 420 00
To reinstate account written
off on May 10.

1st Entry

In
In November,
November, D. D. L.
L. Ross
Ross remits
remits aa check
check
for
for $420
$420 in
in payment
payment ofof his
his account.
account.
 The
The Direct
Direct Write-Off
Write-Off Method
Method

Nov. 1 Cash 420 00

Accounts Receivable—D. L. Ross 420 00
To record collection on
account.

2nd Entry
A
A second
second entry
entry isis needed
needed to
to record
record
receipt
receipt of
of the
the cash.
cash.
 Notes
Notes Receivable
Receivable
2,500.00
$_____________ Payee
Payee
Fresno, California______________20___
March 16 06
Ninety days
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Judson Company
THE ORDER OF ____________________________________________
Two thousand five hundred
_________________________________________________DOLLARS
00/100---------------------------
PAYABLE AT City National Bank
Maker
Maker
______________________________________________
VALUE RECEIVED WITH INTEREST AT 10% ____
14
NO. _______ June 14, 2006
DUE___________________

H. B. Lane
TREASURER, WILLIARD COMPANY
 Notes
Notes Receivable
Receivable
A promissory note is a written
document containing a promise to pay:

 aa specific
specific amount
amount ofof money
money (principal)
(principal)

 to
to aa specific
specific person
person or
or company
company (payee)
(payee)

 at
at aa specific
specific place
place

 on
on aa specific
specific date
date or
or upon
upon demand
demand

 plus
plus interest
interest at
at aa specific
specific percentage
percentage of
of
the
the principal
principal (face)
(face) amount
amount perper year
year
Notes
Notes Receivable
Receivable
Let’s
Let’s
The
The determine
datedetermine
date aa note tothe
note isis to the
be
be paidpaid isis
due
due date
called thefor
the
date
called dueaadate.
due
for 90-day
90-day
date. ItIt isis also
also
referred
note
referred to
datedto as the
March maturity
note dated March 16. date.
as the 16.
maturity date.
 Notes
Notes Receivable
Receivable
Total days in note 90 days
Number of days in March 31
Issue date of note March 16
Remaining days in March –15 days
75 days
Number of days in April –30 days
45 days
Number of days in May –31 days
Residual days in June 14 days

Answer: June 14
Notes
Notes Receivable
Receivable
The
The amount
amount that
that isis due
due at
at the
the
maturity
maturity or
or due
due date
date isis called
called
the
the maturity
maturity value.
value.
 Notes
Notes Receivable
Receivable
Received
Received aa $6,000,
$6,000, 12%,
12%, 30-day
30-day note
note
dated
dated November
November 21,21, 2006
2006 in
in settlement
settlement
of
of the
the account
account of
of W.
W. A
A Bunn
Bunn Co.Co.
 Notes
Notes Receivable
Receivable

Interest Calculation
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00

Maturity Value Calculation

Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12% note
dated November 21, 2006.

AA $6,000
$6,000 30-day,
30-day, 12%12% note
note dated
dated
November
November 21
21 isis received
received from
from W.
W. AA Bunn
Bunn
Company
Company inin exchange
exchange forfor merchandise.
merchandise.
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
Received principal and interest
on matured note.

On
On December
December 21,21, when
when the
the note
note matures,
matures,
the
the firm
firm receives
receives $6060
$6060 from
from W.
W. A.
A. Bunn
Bunn
Company
Company ($6,000
($6,000 plus
plus $60
$60 interest).
interest).
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Accounts Receivable—Bunn Co. 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
To record dishonored note and
interest.

IfIf W.
W. A.
A. Bunn
Bunn Company
Company failsfails to
to pay
pay the
the note
note on
on
the
the due
due date,
date, itit isis considered
considered aa dishonored
dishonored note
note
receivable
receivable.. The
The note note and
and interest
interest are
are transferred
transferred
to
to the
the customer’s
customer’s account.
account.
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 1 Notes Receivable 4 000 00
Accounts Receivable—Crawford
Company 4 000 00
Received note in settlement of
account.

A
A 90-day,
90-day, 12%
12% note
note dated
dated December
December 1,1, 2006,
2006,
isis received
received from
from Crawford
Crawford Company
Company toto settle
settle
its
its account,
account, which
which has
has aa balance
balance of
of $4,000.
$4,000.
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Adjusting entry for accrued
interest.

Assuming
Assuming that that the
the accounting
accounting period
period
ends
ends on on December
December 31, 31, an
an adjusting
adjusting entry
entry
isis required
required to
to record
record the
the accrued
accrued interest
interest
of
of $40
$40 ($4,000
($4,000 xx 0.12
0.12 xx 30/360).
30/360).
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Mar. 1 Cash 4 120 00
Notes Receivable 4 000 00
Interest Receivable $4,000
$4,000 xx 40 00
Interest Revenue 0.12
0.12 xx 80 00
Received payment on note and 60/360
60/360
interest.

On
On March
March 1,1, 2004,
2004, $4,120
$4,120 isis received
received for
for
the
the note
note ($4,000)
($4,000) and
and interest
interest ($120).
($120).
 Receivables
on the
Balance Sheet
 Crabtree Co. Balance Sheet
December 31, 2006

Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000430,000
Interest receivable 14,500
Merchandise inventory 714,000

Highlighted items are receivables

 Financial
Analysis and
Interpretation
Accounts Receivable Turnover
Net sales
Average accounts receivable
 Accounts
Accounts Receivable
Receivable Turnover
Turnover
2006 2005
Net sales on account $36,000,000 $32,500,000
Accounts receivable (net):
Beginning of year $ 1,080,000 $1,050,000
End of year 1,220,000 1,080,000
Total $2,300,000 $2,130,000
Average $1,150,000 $1,115,000

Accounts receivable turnover 31.3 times 29.1 times

Use:
Use: To
To assess
assess the
the efficiency
efficiency
in
in collecting
collecting receivables
receivables $36,000,000 $32,500,000
and
and inin the
the management
management $1,150,000 $1,115,000
of
of credit.
credit.
 Number
Number of
of Days’
Days’ Sales
Sales in
in Receivables
Receivables

Accounts receivable, end of year

Average daily sales

Accounts receivable,
$1,220,000end of year
=12.4 days
Average daily sales
($36,000,000 on account
÷ 365 days)

Use:
Use: To
To assess
assess the
the efficiency
efficiency inin collecting
collecting
receivables
receivables and
and in
in the
the management
management of of credit.
credit.
Chapter 8

The
The End
End