ACCT 2293 Chapter 8: Reporting and Analyzing Receivables

Vocabulary flashcards covering types of receivables, the allowance method, write-offs, recoveries, aging schedules, notes receivable, statement presentation, and receivables liquidity ratios.

Trade receivables

Accounts receivable and notes receivable that result directly from regular credit sales transactions.

Accounts receivable

Informal amounts owed by customers for goods or services sold on credit, usually due within 30 to 60 days and classified as current assets.

Notes receivable

Formal written promises to pay a specified sum of money on a designated future date, normally bearing interest and classified as current or non-current depending on maturity.

Other (non-trade) receivables

Receivables arising from transactions outside regular sales, including interest receivable, advances to employees, and sales tax or income tax recoverable.

Subsidiary ledger and Control account

A subsidiary ledger maintains separate individual accounts for each customer, while the general ledger control account tracks the total balance and must always equal the aggregate sum of the subsidiary balances.

Allowance method

An accounting method that estimates credit losses at each year end in the same period as the related sales, matching expenses with revenues and reporting receivables at their net carrying amount.

Allowance for Expected Credit Losses

A contra-asset account with a normal credit balance used under IFRS (called Allowance for Doubtful Accounts under ASPE) to reduce gross receivables to the amount expected to be collected.

Direct write-off method

An accounting method that debits Bad Debt Expense only when a specific account is determined uncollectible; it violates the matching principle and is prohibited under GAAP/IFRS unless losses are immaterial.

Maker and Payee

The maker is the party who executes a promissory note and promises to pay; the payee is the party who holds the note and receives the payment.

Journal entry: Credit sale with estimated customer returns (IFRS)

Debit Accounts Receivable for the full gross amount billed, credit Sales for the net amount expected to be kept, and credit Refund Liability for the estimated return amount. Used upon recording an initial credit sale when return estimates exist.

Journal entry: Year-end adjusting entry for estimated credit losses

Debit Credit Losses (or Bad Debt Expense) and credit Allowance for Expected Credit Losses. Used at fiscal year-end to adjust the allowance account to the target balance determined by the aging schedule.

Journal entry: Writing off an uncollectible customer account (allowance method)

Debit Allowance for Expected Credit Losses and credit Accounts Receivable (both control and customer subsidiary account). Used when a specific customer balance is formally approved as uncollectible, resulting in no income statement impact.

Journal entry: Reinstating an account previously written off (Recovery Step 1)

Debit Accounts Receivable and credit Allowance for Expected Credit Losses. Used to reverse the original write-off when a customer subsequently pays after their balance was eliminated.

Journal entry: Recording cash collection of a recovered account (Recovery Step 2)

Debit Cash and credit Accounts Receivable. Used immediately after reinstatement to record the customer's cash receipt.

Journal entry: Settling an overdue accounts receivable balance with a promissory note

Debit Notes Receivable and credit Accounts Receivable for the face value of the note. Used when an overdue trade debtor is granted an extension supported by a formal written note.

Journal entry: Year-end accrual of earned interest on an outstanding note receivable

Debit Interest Receivable and credit Interest Revenue for the accrued interest earned up to year-end. Used when an interest-bearing note receivable spans across fiscal periods.

Journal entry: Note receivable honoured at maturity (with prior accrued interest)

Debit Cash for total proceeds, credit Notes Receivable for face value, credit Interest Receivable for the amount accrued at previous year-end, and credit Interest Revenue for interest earned in the current period. Used when a note is collected in full at maturity.

Journal entry: Dishonoured note receivable when ultimate collection is still expected

Debit Accounts Receivable for face value plus total accrued interest, credit Notes Receivable for face value, and credit Interest Receivable (and/or Interest Revenue). Used when the maker fails to pay at maturity but recovery is still expected.

Journal entry: Dishonoured note receivable when collection is hopeless

Debit Credit Losses (or Allowance for Expected Credit Losses) and credit Notes Receivable and Interest Receivable. Used when the maker defaults on a promissory note and there is no expectation of future collection.

Step-by-step: Calculating the required allowance balance using an Aging Schedule

1. Categorize each customer receivable into specific age categories (such as not yet due, 1–30 days overdue, 31–60 days overdue). 2. Sum the receivables in each column. 3. Multiply each column total by its estimated uncollectible percentage (higher percentages applied to older balances). 4. Sum the uncollectible amounts across all columns to find the total required ending balance in the allowance account.

Step-by-step: Calculating the adjusting entry amount for Credit Losses

1. Identify the target ending allowance balance from the aging schedule.
   
   2. Check the existing unadjusted balance in Allowance for Expected Credit Losses.
   
   3. If the unadjusted balance is a credit, subtract it from the required balance: $\text{Entry amount} = \text{Required balance} - \text{Existing credit balance}$ . If the unadjusted balance is a debit, add it to the required balance: $\text{Entry amount} = \text{Required balance} + \text{Existing debit balance}$. 4. Prepare the journal entry debiting Credit Losses and crediting Allowance for Expected Credit Losses for this calculated amount.

Step-by-step: Calculating interest on a note receivable

1. Identify the principal (face value), annual interest rate, and term of the promissory note. 2. Determine the time fraction representing the period the note was outstanding during the year ($\frac{\text{Months}}{12}$ or $\frac{\text{Days}}{365}$). 3. Apply the interest formula: $\text{Interest} = \text{Face value} \times \text{Annual rate} \times \frac{\text{Months outstanding}}{12}$. 4. Record interest revenue only for the exact period earned.

Calculating net carrying amount of Accounts Receivable

1. Obtain the gross balance of Accounts Receivable from the general ledger control account.

2. Obtain the adjusted ending credit balance of Allowance for Expected Credit Losses.

3. Subtract the allowance from gross receivables: $\text{Carrying amount} = \text{Accounts receivable} - \text{Allowance}$. 4. Verify that this net figure represents the total cash expected to be collected.

Step-by-step: Presenting receivables on the Statement of Financial Position

1. In the current assets section (after cash and short-term investments), report Accounts Receivable at gross value.
   
   

2. Subtract the Allowance for Expected Credit Losses to display the net carrying amount.
   
   3. Report short-term Notes Receivable and accrued Interest Receivable separately.
   
   4. Classify any promissory notes due beyond one year or the operating cycle under non-current assets.

Step-by-step: Presenting receivables items on the Statement of Income

1. Report Credit Losses (Bad Debt Expense) under operating expenses when determining income from operations.
   
   2. Separate financing and interest activities from operations.
   
   3. Report Interest Revenue from notes receivable under other revenues and expenses below income from operations.

Step-by-step: Calculating and analyzing the Receivables Turnover ratio

1. Calculate average gross accounts receivable: $\text{Average gross A/R} = \frac{\text{Beginning gross A/R} + \text{Ending gross A/R}}{2}$.
   
   2. Divide credit sales (or net sales) by average gross accounts receivable: $\text{Receivables turnover} = \frac{\text{Credit sales}}{\text{Average gross accounts receivable}}$.
   
   3. Interpret liquidity: a higher ratio shows faster collection of receivables.

Step-by-step: Calculating and evaluating the Average Collection Period

1. Calculate the receivables turnover ratio for the fiscal period.
   
   

2. Divide 365 days by the receivables turnover ratio: $\text{Average collection period} = \frac{365}{\text{Receivables turnover}}$.
   
   

3. Compare the resulting number of days to the company's stated credit terms (for example, net 30) to evaluate whether collections are prompt or delayed.