Chapter 8: Receivables

What are receivables?

Amounts or claims owed to the company.

• people, companies, and other organizations

What is Accounts Receivable?

Amounts owed by customers from credit sales.

• selling merchandise on account and are normally collected within short period, such as 30 or 60 days

• classified as a Current Asset

What is Notes Receivable?

A written promise from a customer/borrower to pay.

• amount that customers owe in formal, written instrument of credit issued

• expected to pay in 1 year

• classified as Current Asset

What is Other Receivables?

Interest receivable, taxes receivable, and receivable from officers or employees

• within 1 year is a Current Asset

• If longer than 1 year is Non-current asset & under Investments

What is Uncollected Receivable?

Customers NOT paying their accounts

What is bad debt expense?

Expense made when there is failure to collect receivable

What are some indications of uncollectible?

receivable is past due, customers does NOT respond, bankruptcy, customer closes business, company cant locate its customers

What is the direct write-off method?

Bad debt expense is recorded when a specific account is uncollectible

Direct write-off journal entry?

Bad Debt Expense xxxx

Accounts Receivable xxxx

What is the allowance method?

Estimates uncollectible accounts before specific accounts are written off

Allowance method: estimate entry?

Bad Debt Expense xxxx

Allowance for Doubtful Accounts xxxx

Allowance method: write-off entry?

Allowance for Doubtful Accounts xxxx

Accounts Receivable xxxx

Allowance method: Actually collected?

Cash xxx

Accounts Receivable xxxx

What does the % of sales method calculate?

Bad Debt Expense directly.

Does existing allowance affect % of sales adjustment?

No. The percentage of sales determines Bad Debt Expense directly.

What does the aging method determine?

The desired ending balance of Allowance for Doubtful Accounts

Aging method: existing credit balance?

Subtract existing credit balance from desired ending allowance.

Aging method: existing debit balance?

Add the debit balance to the desired ending allowance.

What is note interest and its formula?

Interest compounded by notes receivable

• Face Amount × Interest Rate × Days/365

What is maturity value and its formula?

amount that must be paid at due date of note which is sum of face and interest

• Face Amount + Interest

Note accepted for an existing A/R?

Notes Receivable xxxx

Accounts Receivable xxxx

Note collected at maturity?

Cash xxxx

Notes Receivable xxxx

Interest Revenue xxxx

What happens to older receivables?

They are generally less likely to be collected.

What is receivables turnover?

Measures how efficiently a company collects its receivables.

Formula = Sales / average accounts receivable

• average accounts receivable = (beginning + ending) / 2

What is days’ sales in receivables?

Measures the average number of days to collect receivables.

Formula = Average accounts receivable / average daily sales

• Average accounts receivable = (beginning + ending) / 2

• Average daily sales = sales / 365

What are the two methods to estimate uncollectible accounting?

Percent Sales method & Analysis of Receivable method

How does Percent sales and Analysis of receivable compare?

Percent of sales focuses on estimation process while analysis focuses on how allowance of doubtful is the estimate

If receivable has been deemed uncollectable in direct write off. What is the Journal entry?

Accounts Receivable xxxx

Bad Debt expense xxxx

If bed debt expense is payed later what is the Journal Entry?

Cash xxxx

Accounts Receivable xxxx

Comparing Direct Write off & Allowance of Account

	Direct Write-Off	Allowance of Doubt Acct
Bad Debt is recorded	When a specific customer's account is determined uncollected	Estimated based on Percentage of Sales
Allowance of Account	No Allowance is Used	Allowance of Account is used

Compare how Primary users is used differently in direct write-off and allowance of doubtful account

	Direct Write-Off	Allowance for doubtful accounts
Primary Users	Small companies and companies with few receivables	Large companies and those with large amounts of receivables

What are the Characteristics of a promissory note?

1. The maker is the party making the promise to pay.

2. The payee is the party to whom the note is payable.

3. The face amount is the amount for which the note is written on its face.

4. The issuance date is the date a note is issued.

5. The due date or maturity date is the date the note is to be paid.

6. The term of a note is the amount of time between the issuance and due dates.

7. The interest rate is that rate of interest that must be paid on the face amount for the term of the note.

What are the steps of Analysis of Receivable Method? Also known as Aging the Receivables!

1. The due date of each account receivable is determined.

2. The number of days each account is past due is determined. This is the number of days between the due date of the account and the date of the analysis.

3. Each account is placed in an aged class according to its days past due.

4. The totals for each aged class are determined

5. The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class.

6. The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class.