Chapter 8 accounting receivables

Recivables

Amounts due from individuals or other companies

Accounts recievable

• Amounts owed by customers on account

• Expected to be collected within 30 - 60 days

Note receivables

• Supported by formal instruments of credit

• For periods of 30 days or longer

• Interest-bearing

A receivable is recorded when:

• Services are provided

• Merchandise is sold on account

• Subsidiary accounts receivable ledger:  

is used to track individual customer accounts

Each entry is effectively posted twice:

• To the subsidiary ledger

• To the general ledger in summary form(the total for month)

• Other transactions are posted in a similar manner:

• Account collections

• Interest charged on overdue accounts

Non-bank credit card sales:

•  are treated as sales on account

• Unlike bank credit card sales - treated as cash sales

Dr a/r

Dr credit card expense

CR sales 

Receipt of cash from non-bank credit cards is recorded as follows

DR cash

CR A/R

Bank credit card sales are treated as a cash sale

DR cash

DR credit card expense

CR sales

Bank debit card sales

are also treated as a cash sale but usually based on the # of Transactions 

DR cash

DR debit card expense

CR sales

Valuing accounts receivables

• Some receivables will become uncollectible

• Not reported as assets if no future benefit

• Net realizable value: the collectible amount

• Receivables are, therefore, written

down to their collectible amount

• By recording a bad debt expense

in the same period as related

revenues are recorded: This

results in matching of revenues

and expenses

The allowance method

1.Amount of uncollectible receivables is

estimated and recorded at end of period

2.Specific amounts determined

uncollectible are written off

against the allowance

3.Specific amounts that are

recovered are reversed out

of allowance and the

collection recorded

Write off method

Accounts are written-off directly to bad debts

expense when they are deemed uncollectible.

(This is not allowed under GAAP)

Recording estimated uncollectibles

DR bad debt expense

CR Allowance for doubtful accounts

Allowance for doubtful accounts

• contra current asset account

• • Deducted from Accounts Receivable in the

  current assets section of balance sheet

  • A/R Net Realizable value = Accounts Receivable

  less Allowance for Doubtful Accounts

Two methods of estimating allowance

• percentage of sales

• percentage of recievables

Percentage of receivable 

• Calculates the percentage of receivables that are estimated to be uncollectible

• Based on past experience and credit policy

• Can be applied to total receivables balance or amounts grouped by age

• Requires an aging schedule to be prepared

• Better estimate of net realizable value, Also called the balance sheet method

Percentage of sales

• Calculates bad debt expense as a percentage of net credit sales

• Based on past experience and company’s credit policy

• Example: 2% of credit sales of $1,200,000 = $24,000

• Better matches revenues and expenses

• Also called the income statement method

Recording write off of an uncollectible account

DR Allowance for doubtful accounts

CR accounts recievable

Recovery of an uncollectibke account

DR A/R

CR Allowance for doubtful accounts

DR Cash

CR accounst receivable

Recoginzing note receivables

• A written promise to pay a specified amount of money on demand or at a definite time

If note is received to settle an outstanding account receivable:

DR Notes receivables 

CR Accounts recievables

• If received at the time of sale the cr. is to Sales

Notes are valued at

Net realizable value

• Similar process to determine bad debt expense and allowance as for accounts receivable

Formula for calculating interest

PRT

• An annual rate of interest - to determine monthly interest, divide by twelve

• Separate interest receivable account is used (value of note is not altered)

A note is honoured when

paid in full on its maturity date

DR cash 

CR Note receivable 

CR Interest receivable 

CR Interest revenue 

A note is dishonoured

if not paid in full matruity

DR A/R

CR Note recievable

CR interest revenue

CR interest recievables

If not note is dishonoured and collection is not expected 

DR Allowance for doubtful accounts

CR note recievable 

Receivable turnogver ratio

= Net Credit Sales ÷

Average Gross Receivables

• Measures the number of times that receivables are collected in a period

• Higher the number, the more liquid are receivables

Collection period

= 365 ÷ Receivables Turnover Ratio

• Calculates the average number of days that accounts receivable are outstanding

Operating

= Days Sales in Inventory + Collection Period

• Calculates the number of days to complete the operating cycle

• Purchase of inventory through collection of cash