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Chapter 9
Receivables
Refers to amounts due from individuals
and companies - expected to be collected in cash Frequently classified as: Accounts receivable Notes receivable Other receivables
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Accounts Receivable
Amounts owed by customers on account Result from the sale of goods/services Expected to be collected within 30-60
days Most significant type of claim held by company Often called trade receivables.
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Notes Receivable
Represent claims for which formal instruments of credit are issued as evidence of debt.
Notes Receivable
Credit instrument normally requires: payment of interest extends for time periods of 60-90 days or longer
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Notes Receivable
Result from sale of goods and services
assets than accounts receivable Negotiable instruments and may be transferred to another party by endorsement
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Trade Receivable
Notes and accounts receivables that result from sales transactions.
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Other Receivables
Nontrade including: interest receivable loans to company officers advances to employees income taxes refundable
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Accounts Receivable
Are recorded at point of sale of merchandise on account.
Accounts Receivable 100 Sales 100
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share a common characteristic. The subsidiary ledger for accounts receivable provides the details that support the accounts receivable control account in the general ledger.
Separation of duties
Objective 2 Use the allowance method to account for uncollectibles and estimate uncollectibles by the percent of sales and aging approaches.
order to increase sales. The credit department evaluates customers who apply for credit cards.
collected in cash Excludes amounts the company estimates it will not collect
Keeps Receivables from Being Overstated on the Balance Sheet.
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Allowance method
Allowance Method
The matching principle dictates that the
bad debt expense must be recorded in the period when the related revenue is earned. There are many acceptable methods to estimate uncollectible accounts.
Allowance Method
Nov 9 Dec 31 End of Fiscal Year Apr 30
The Allowance Method has two advantages: 1. Expenses are matched with Prepare adjusting entry revenues in the same accounting period based on estimatesare reported on 2. Accounts Receivables balance sheet at the amount of cash expected to be collected
Allowance Method
Operating expense
GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT
Allowance Method
Gross Accounts Receivable reported on balance sheet at its amount net realizable value
uncollectible
Aging of Receivables
Percentage of Sales
This is also called the income statement
approach. It is based on prior experience of the business. It is computed as a percentage of credit sales. It ignores the current balance of the allowance account. The percentage used is adjusted as needed to reflect collection experience.
estimates (based on prior experience) that 1% of net credit sales are uncollectible. Net credit sales for the year just ended were $500,000. What is the adjusting entry? $500,000 1% = $5,000
Dec 31, 20xx Uncollectible Account Expense 5,000 Allowance for Uncollectible Accounts 5,000 Recorded expense for the year
sheet approach because it focuses on accounts receivable. Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.
past collection experience indicates the following: Length of time % uncollectible 1-30 days 2.0 31-60 days 3.0 61-90 days 5.0 90 + days 8.0
% 2 3 5 8
$143,000 balance: Assume that the account currently has a credit balance of $100,000. What is the adjustment?
Aging of Receivables
Uncollectible Account Expense 43,000 Allowance for Uncollectible Accounts 43,000 To record allowance for uncollectibles
Aging of Receivables
Allowance for Uncollectible Adjustment 1,000 144,000 Adjusted balance 143,000
Amount of
UNCOLLECTIBLE ACCOUNTS RECEIVABLE
that an account will not be collected? It must be written off. How? Debit Allowance for Uncollectible Accounts. Credit Accounts Receivable.
Recoveries
How is the collection of a previously written-
off account recorded? Debit Accounts Receivable (to reinstate the account). Credit Allowance for Uncollectible Accounts. Debit Cash. Credit Accounts Receivable (to record the collection).
Objective 3
off only when it becomes uncollectible. No allowance account is created. This method is simple to use. The balance sheet is overstated. The income statement is understated.
Apr 30
Expense Recorded
department. The retailer is required to pay a fee (called a discount) for usage.
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100
may be given in settlement of an account receivable. The maker pays the payee the maturity value. The maturity value includes principal plus interest.
Maker
Is the party in a promissory note who is making the promise to pay.
Payee
Is the party to whom payment of a promissory note is to be made.
Interest rate
Date of issue
Maturity date
the days from the date of issue. The date the note was issued is omitted. The maturity date is counted.
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Notes Receivable
A note is recorded at
face value without interest added. Notes receivable are reported at cash (net) realizable value. A note is honored when it is paid in full at maturity.
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December 31. How much interest was earned by the bank as of December 31? $10,000 10% (31 360) = $86.11
86.11
at maturity?
February 28 Cash Note Receivable Interest Receivable Interest Revenue Record interest on note
10,250.00
10,000.00 86.11 163.89
maturity value to the new payee, then the original payee legally must pay the bank the amount due.
Reporting Receivables
Some companies report a single amount for
its current receivables in the body of the balance sheet. They use a note to the financial statements to give more details.
Objective 6
Use the acid-test ratio and days sales in receivables to evaluate a company.
Acid-Test Ratio
This is a stringent test of liquidity.
It measures the entitys ability to pay its
Acid-test ratio = (Cash + Short-term investments + Net current receivables) Total current liabilities
Days sales in average accounts receivable = Average net accounts receivable One days sales
End of Chapter 9