PREVIEW OF CHAPTER 9
ACCOUNTING FOR
RECEIVABLES
Accounts
Receivable
¾
Types of
Receivables
¾
Determining
maturity date
¾
Recognizing
accounts
receivable
¾
Computing
interest
¾
¾
Valuing accounts
receivable
Recognizing notes
receivable
¾
Valuing notes
receivable
Disposing of notes
receivable
¾
Disposing of
accounts
receivable
¾
„ The term receivables refers to amounts due from
individuals and other companies; they are
claims expected to be collected in cash.
„ Three major classes of receivables are:
1 Accounts receivable are amounts owed
by customers on account.
2 Notes receivable are claims for which
formal instruments of credit are issued.
3 Other receivables include nontrade
receivables such as interest receivable and
advances to employees.
Statement
Presentation and
Analysis of
Receivables
Notes Receivable
¾
Presentation
¾
Analysis
RECEIVABLES
ACCOUNTS RECEIVABLE
The three primary accounting problems
associated with accounts receivable are:
1 Recognizing accounts receivable.
2 Valuing accounts receivable.
3 Disposing of accounts receivable.
RECOGNIZING ACCOUNTS
RECEIVABLE
GENERAL JOURNAL
Date
July 1
Account Titles and Explanation
Accounts Receivable
Sales
(To record sales on account)
Debit
Credit
1,000
1,000
When a business sells merchandise to a customer on credit,
Accounts Receivable is debited and Sales is credited.
RECOGNIZING ACCOUNTS
RECEIVABLE
RECOGNIZING ACCOUNTS
RECEIVABLE
GENERAL JOURNAL
Date
July 5
Account Titles and Explanation
Sales Returns and Allowances
Accounts Receivable
(To record merchandise returned)
GENERAL JOURNAL
Debit
Credit
100
100
When a business receives returned merchandise previously
sold to a customer on credit, Sales Returns and Allowances
is debited and Accounts Receivable is credited.
Date
July 11
Account Titles and Explanation
Cash
Sales Discounts
Accounts Receivable
(To record collection of accounts
receivable)
Debit
Credit
882
18
900
When a business collects cash from a customer for
merchandise previously sold on credit during the discount
period, Cash and Sales Discounts are debited and Accounts
Receivable is credited.
VALUING ACCOUNTS
RECEIVABLE
THE ALLOWANCE METHOD
„ To ensure that receivables are not overstated on the
balance sheet, they are stated at their cash realizable
value.
„ Cash (net) realizable value is the net amount expected
to be received in cash and excludes amounts that the
company estimates it will not be able to collect.
„ Credit losses are debited to Bad Debts
Expense and are considered a normal
and necessary risk of doing business.
„ Two methods of accounting for uncollectible
accounts are the:
1 allowance method and
2 direct write-off method.
RECORDING ESTIMATED
UNCOLLECTIBLES
„ The allowance method is required
when bad debts are deemed to be
material in amount.
„ Uncollectible accounts are
estimated and matched against sales
in the same accounting period in
which the sales occurred.
RECORDING THE WRITE-OFF
OF AN UNCOLLECTIBLE
ACCOUNT
GENERAL JOURNAL
Date
Dec. 31
Account Titles and Explanation
Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimate of
uncollectible accounts)
GENERAL JOURNAL
Debit
Credit
12,000
Date
Mar. 1
12,000
Account Titles and Explanation
Allowance for Doubtful Accounts
Accounts Receivable — R. A. Ware
(Write-off of R. A. Ware account)
Debit
Credit
500
500
Estimated uncollectibles are debited to Bad Debts Expense
and credited to Allowance for Doubtful Accounts at the
end of each period.
Actual uncollectibles are debited to Allowance for Doubtful
Accounts and credited to Accounts Receivable at the time
the specific account is written off.
RECOVERY OF AN
UNCOLLECTIBLE ACCOUNT
RECOVERY OF AN
UNCOLLECTIBLE ACCOUNT
GENERAL JOURNAL
Date
July 1
Account Titles and Explanation
Accounts Receivable — R. A. Ware
Allowance for Doubtful Accounts
(To reverse write-off of R. A. Ware
account)
GENERAL JOURNAL
Debit
Credit
500
500
When there is recovery of an account that has been
written off: 1 reverse the entry made to write off the
account and...
Date
July 1
Account Titles and Explanation
Cash
Accounts Receivable — R. A. Ware
(To record collection from R. A.
Ware)
Debit
2 record the collection in the usual
manner.
Credit
500
500
ILLUSTRATION 9-5
COMPARISON OF BASES OF
ESTIMATING UNCOLLECTIBLES
BASES USED FOR THE
ALLOWANCE METHOD
„ Companies use either of two methods
in the estimation of uncollectibles:
1 percentage of sales or
2 percentage of receivables.
„ Both bases are in accordance with
GAAP; the choice is a
management decision.
Percentage of Sales
Matching
Sales
„ In the percentage of sales basis, management
establishes a percentage relationship between
the amount of credit sales and expected losses
from uncollectible accounts.
„ Expected bad debt losses are
determined by applying the
percentage to the sales base
of the current period.
„ This basis better matches expenses
with revenues.
PERCENTAGE OF
RECEIVABLES BASIS
„ Under the percentage of receivables basis, the
balance in the allowance account is derived
from an analysis of individual customer
accounts often called aging the accounts
receivable.
„ The amount of the adjusting entry is the
difference between the required balance and
the existing balance in the allowance account.
„ This basis produces the better estimate
of cash realizable value of receivables.
Cash Realizable Value
Bad Debts
Expense
Emphasis on Income Statement
Relationships
PERCENTAGE OF
SALES BASIS
Percentage of Receivables
Allowance
for
Doubtful
Accounts
Accounts
Receivable
Emphasis on Balance Sheet
Relationships
PERCENTAGE OF
SALES BASIS
GENERAL JOURNAL
Date
Dec. 31
Account Titles and Explanation
Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimated bad debts for
year)
Debit
Credit
8,000
8,000
If net credit sales for the year are $800,000, the estimated bad
debts expense is $8,000 (1% X $800,000).
PERCENTAGE OF
RECEIVABLES BASIS
GENERAL JOURNAL
Date
Dec. 31
Account Titles and Explanation
Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimated bad debts for
year)
Debit
Credit
1,700
1,700
If the trial balance shows Allowance for Doubtful Accounts
with a credit balance of $528, an adjusting entry for $1,700
($2,228 - $528) is necessary.
DIRECT WRITE-OFF METHOD
„ Under the direct write-off method, bad debt losses
are not anticipated and no allowance account is
used.
„ No entries are made for bad debts until an account is
determined to be uncollectible at which time the loss
is charged to Bad Debts Expense.
„ No attempt is made to match bad debts to sales
revenues or to show cash realizable value of accounts
receivable on the balance sheet.
„ Consequently, unless bad debt losses are
insignificant, this method is not acceptable for
financial reporting purposes.
DISPOSING OF
ACCOUNTS RECEIVABLE
„ To accelerate the receipt of cash from
receivables, owners frequently:
1 sell to a factor such as a finance
company or a bank and
2 make credit card sales
„ A factor buys receivables
from businesses for a fee
and collects the payments
directly from customers.
CREDIT CARD SALES
„ Credit cards are frequently used by retailers
who wish to avoid the paperwork of issuing
credit.
„ Retailers can receive cash more quickly from
the credit card issuer.
„ A credit card sale occurs when a company
accepts national credit cards, such as Visa,
MasterCard, Discover, American Express,
and Diners Club.
DIRECT WRITE-OFF METHOD
GENERAL JOURNAL
Date
Dec. 12
Account Titles and Explanation
Bad Debts Expense
Accounts Receivable — M. E. Doran
(To record write-off of M. E. Doran
account)
Debit
Credit
200
200
Warden Co. writes off M. E. Doran’s $200 balance as
uncollectible on December 12. When this method is used,
Bad Debts Expense will show only actual losses from
uncollectibles.
SALE OF RECEIVABLES
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Debit Credit
588,000
Cash
Service Charge Expense (2% x $600,000) 12,000
600,000
Accounts Receivable
(To record the sale of accounts
receivable)
Hendredon Furniture factors $600,000 of receivables to
Federal Factors, Inc. Federal Factors assesses a
service charge of 2% of the amount of receivables sold.
CREDIT CARD SALES
„ Three parties involved when credit cards are
used in making retail sales are:
1 the credit card issuer,
2 the retailer, and
3 the customer.
„ The retailer pays the credit card issuer
a fee of 2-6% of the invoice price for
its services.
„ From an accounting standpoint, sales from Visa,
MasterCard, and Discover are treated differently
than sales from American Express and Diners
Club.
VISA, MASTERCARD,
AND DISCOVER SALES
„ Sales resulting from the use of VISA,
MasterCard, and Discover are considered
cash sales by the retailer.
„ These cards are issued by banks.
„ Upon receipt of credit card sales slips from a
retailer, the bank immediately
adds the amount to the
seller’s bank balance.
AMERICAN EXPRESS &
DINERS CLUB SALES
„ Sales using American Express and
Diners Club cards are reported as
credit sales, not cash sales.
„ Conversion into cash does not
occur until American
Express/Diners Club remits the net
amount to the seller.
VISA, MASTERCARD,
AND DISCOVER SALES
GENERAL JOURNAL
Date
July 31
Account Titles and Explanation
Cash
Service Charge Expense
Sales
(To record VISA credit card sales)
Debit
Credit
970
30
1,000
Lee Lenertz purchases a
number of compact discs for
her restaurant from Brieschke
Music Co. for $1,000 using her
VISA First Bank Card. The
service fee that First Bank
charges is 3%.
AMERICAN EXPRESS
SALES
GENERAL JOURNAL
Date
Account Titles and Explanation
July 31 Accounts Receivable — American Express
Service Charge Expense
Sales
(To record American Express
credit card sales)
Debit
Credit
285
15
300
Four Seasons restaurant accepts
an American Express card for a
$300 bill. The service fee is 5%.
NOTES RECEIVABLE
NOTES RECEIVABLE
„ A promissory note is a written promise
to pay a specified amount of money on
demand or at a definite time.
„ The party making the promise is the
maker.
„ The party to whom
payment is made is
called the payee.
„ When the life of the note is expressed
in terms of months, the due date is
found by counting the months from
the date of issue
„ Example: The maturity
date of a 3-month note
dated May 31 is August 31.
ILLUSTRATION 9-13
FORMULA FOR
COMPUTING INTEREST
ILLUSTRATION 9-11
DETERMINING THE MATURITY DATE
„ When the life of the note is expressed in terms
of days, it is necessary to count the days.
„ In counting days, the date of issue is omitted
but the due date is included.
„ Example: The maturity date of a 60-day note
dated July 17 is:
Term of note
July 31 – 17
August
Maturity date, September
The basic formula for computing
interest on an interest-bearing note is:
.
Annual
Time
Face Value
of Note
X
Interest
Rate
X
in Terms of
One Year
Interest
=
60
14
31
The interest rate specified on the
note is an annual rate of interest
45
15
ILLUSTRATION 9-14
COMPUTATION OF INTEREST
RECOGNIZING NOTES
RECEIVABLE
GENERAL JOURNAL
Terms of Note
Face
$ 730, 18%, 120 days
$1,000, 15%, 6 months
$2,000, 12%, 1 year
$ 730
$1,000
$2,000
Interest Computation
X Rate X
=
Time
Interest
X
X
X
$ 43.80
$ 75.00
$240.00
18%
15%
12%
X
X
X
120/360
6/12
1/1
=
=
=
Helpful hint: The interest rate specified is the annual rate.
Date
Account Titles and Explanation
May 1 Notes Receivable
Accounts Receivable — Brent Company
(To record acceptance of Brent
Company note)
Credit
1,000
Wilma Company receives a $1,000, 2-month, 12% promissory
note from Brent Company to settle an open account.
VALUING NOTES
RECEIVABLE
„ Like accounts receivable, short-term
notes receivable are reported at their
cash (net) realizable value.
„ The notes receivable
allowance account is
Allowance for
Doubtful Accounts.
Debit
1,000
HONOR OF NOTES
RECEIVABLE
GENERAL JOURNAL
Date
Oct. 1
Account Titles and Explanation
Cash
Notes Receivable
Interest Revenue
(To record collection of Higley Inc.
note)
Debit Credit
10,300
10,000
300
„ A note is honored when it is paid in full at its maturity date.
„ For each interest-bearing note, the amount due at maturity
is the face value of the note plus interest for the length of
time specified on the note.
„ Betty Co. lends Higley Inc. $10,000 on June 1, accepting a
4-month, 9% interest-bearing note.
„ Betty Co. collects the maturity value of the note from
Higley on October 1.
HONOR OF NOTES
RECEIVABLE
HONOR OF NOTES
RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
Sept. 30 Interest Receivable
Interest Revenue
(To accrue four months' interest)
GENERAL JOURNAL
Debit
Credit
300
300
Date
Oct. 1
Account Titles and Explanation
Cash
Notes Receivable
Interest Receivable
(To record collection of note at
maturity)
Debit Credit
10,300
10,000
300
If Betty Co. prepares prepares financial statements as of
September 30, interest for 4 months, or $300, would be accrued.
When interest has been accrued, it is necessary
to credit Interest Receivable at maturity.
DISHONOR OF
NOTES RECEIVABLE
BALANCE SHEET PRESENTATION
OF RECEIVABLES
GENERAL JOURNAL
Date
Oct. 1
Account Titles and Explanation
Accounts Receivable
Notes Receivable
Interest Revenue
(To record the dishonor of the
note)
Debit Credit
10,300
10,000
300
„ A dishonored note is a note that is not paid in full at
maturity.
„ A dishonored note receivable is no longer negotiable.
„ Since the payee still has a claim against the maker of the
note, the balance in Notes Receivable is usually
transferred to Accounts Receivable.
„ In the balance sheet, short-term receivables are
reported within the current assets section below
short term investments.
„ Both the gross amount of receivables and the
allowance for doubtful accounts should be
reported.
„ The following shows the current asset presentation
of receivables for Kellogg Company at December
31.
KELLOGG COMPANY
Accounts receivable (in millions)
Less: Allowance for doubtful accounts
Net receivables
$705.9
12.9
$693.0