Part 4: Receivables and Credit Losses

A/R, Notes Receivable, Other Receivables

A/R: amount customers owe the company

Notes Receivable: Formal credit instrument/written promise to pay.

Other Receivables: includes interest receivable, loans & advances to employees, and recoverable sales tax.

Net Accounts Receivable (What + Formula)

What appears on the Balance Sheet. It reflects the expected collectible amount.

Net A/R = Gross A/R - Allowance for Expected Credit Loss

Gross A/R: total amount due from customers

Allowance for Expected Credit Loss: Contra Asset Account that reduces A/R to the amount expected to be collected.

Allowance Method (3 Steps)

1. Estimate the AFECL with Aging Method

2. Write Off of Specific Amounts

3. Write Off Recovery

Aging Method

Categorizes A/R by age with older accounts less likely to be collected.

Step 1: Estimate the AFECL with Aging Method

A. Determine the REQUIRED ending balance in AFECL

• do this with the aging schedule

B. Compare REQUIRED ending AFECL to the CURRENT (unadjusted) balance

• Allowance account already has a balance from past years, adjusting entries, and write offs

• This appears as the unadjusted balance in the AFECL T-account

• Adjustment = Required ending AFECL - Current (unadjusted) AFECL balance

C. Record the adjusting entry

If: Required > Current, increase AFECL (normal case)

Credit Loss Expense

• Allowance for Expected Credit Losses

Step 2: Write Off of Specific Accounts

Occurs during the year when a customer account is determined uncollectible.

Entry:

AFECL

• Accounts Receivable

Step 3: Write Off Recovery

Occurs during the year when a customer pays after being written off

A. Reverse Write off

Accounts Receivable

• AFECL

B. Record Cash Collection

Cash

• Accounts Receivable

Appearance of Accounts receivable on Financial Statements

1. Balance Sheet

A/R reported at their carrying amount (aka Net Balance)

Gross A/R and AFECL are disclosed in the notes

2. Income Statement

Credit Losses are reported in operating section