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Accounts receivables
 

Accounts receivables

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    Accounts receivables Accounts receivables Presentation Transcript

    • Accounts Receivable
    •  
    • JOIN KHALID AZIZ
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      • Generally, two major issues:
      • How to Record Sales Discounts
      • How to Record Doubtful Receipts
    • Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10, n/30
    • Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10 , n/30 2% discount if paid within 10 days
    • Accounts Receivable Discounts The most prevalent is the cash discount for early payment on the account. Example: 2/10, n/30 Net amount due in 30 days.
    • Usually for firms whose clients generally take advantage of the discounts Accounts Receivable Discounts Two methods to record the discount:
      • Gross Method: record primary sale at gross amount
      Usually for firms whose clients generally don’t take advantage of the discounts
      • Net Method: record primary sale at net-of-discount amount
    • Gross Method Jan 1 Accts Rec 10,000 Sales 10,000 Accounts Receivable Discounts Example: Jan 1 st , sell Rs10,000 of product under 2/10, n/30 terms.
    • Accounts Receivable Discounts Example: Jan 1 st , sell Rs10,000 of product under 2/10, n/30 terms. Recorded as if discount won’t be taken Gross Method Jan 1 Accts Rec 10,000 Sales 10,000
    • Accounts Receivable Discounts Example: Jan 1 st , sell Rs10,000 of product under 2/10, n/30 terms. Gross Method Jan 1 Accts Rec 10,000 Sales 10,000 Net Method Jan 1 Accts Rec 9,800 Sales 9,800
    • Accounts Receivable Discounts Example: Jan 1 st , sell Rs10,000 of product under 2/10, n/30 terms. Gross Method Jan 1 Accts Rec 10,000 Sales 10,000 Net Method Jan 1 Accts Rec 9,800 Sales 9,800 Recorded as if discount will be taken
    • Gross Method Jan 9 Cash 9,800 Sales Discs 200 Accts Rec 10,000 Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period
    • Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9 Cash 9,800 Sales Discs 200 Accts Rec 10,000 If the discount is actually realized, it is recorded upon receipt of the cash payment. Sales Discounts is a contra-revenue account.
    • Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9 Cash 9,800 Sales Discs 200 Accts Rec 10,000 Net Method Jan 9 Cash 9,800 Accts Rec 9,800
    • Accounts Receivable Discounts Example: Jan 9th, receive payment within discount period Gross Method Jan 9 Cash 9,800 Sales Discs 200 Accts Rec 10,000 Net Method Jan 9 Cash 9,800 Accts Rec 9,800 Discount has already been recorded on sales date.
    • Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Now assume instead that the payment was sent after the discount period expired.
    • Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29 Cash 10,000 Accts Rec 10,000 No correction needed, since we already assumed the discount would not be taken.
    • Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29 Cash 10,000 Accts Rec 10,000 Net Method Jan 29 Cash 10,000 Accts Rec 9,800 Forfeited Discount 200
    • Accounts Receivable Discounts Example: Jan 29th, receive payment outside discount period Gross Method Jan 29 Cash 10,000 Accts Rec 10,000 Net Method Jan 29 Cash 10,000 Accts Rec 9,800 Forfeited Discount 200 Record the forfeited discount (a revenue account).
    • Accounts Receivable Doubtful Receipts One method of recording default is to record a loss when actual default occurs. This is called the direct write-off method. All receivables have some probability of default. The default on payment needs to be recorded appropriately. Not considered an acceptable method because it does not match revenues with costs effectively.
    • Accounts Receivable Doubtful Receipts The accepted method is called the Allowance Method. An Allowance for Doubtful Accounts is set up as a contra-receivable account (contra-asset). It holds management’s best estimate for the amount of receivables that will default.
    • Accounts Receivable Doubtful Receipts To determine management’s best estimate for default, use one of two methods:
      • Percentage of Sales Method: a fixed percentage
      • of sales will be considered doubtful
      This is also called the balance sheet approach, since the estimate is based on a percentage of a balance sheet receivable account. This is also called the income statement approach, since the estimate is based on a percentage of sales revenue.
      • Percentage of Receivables Method: a fixed
      • percentage of the receivables balance will be
      • considered doubtful
    • Accounts Receivable Example: Assume Paterno Corp. has Rs200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected. 2000 Credit Sales: 0.70 x Rs200,000 = Rs140,000 Estimate of doubtful collections: 0.04 x Rs140,000 = Rs5,600 Doubtful Receipts: Percentage of Sales Method
    • Accounts Receivable Example: Assume Paterno Corp. has Rs200,000 in sales during 2000. Of these sales, 30% are in cash and 70% are on credit. They estimate that 4% of their credit sales will not be collected. Journal entry: Bad Debt Expense Rs5,600 Allowance for Doubtful Accts Rs5,600 Doubtful Receipts: Percentage of Sales Method
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Most firms know that the probability of default is based on the staleness of accounts. For example, credit card companies recognize that the probability of default increases in the length of the time a credit card account remains past due. Firms facing this scenario usually set up aging schedules that outline their estimates for default, based on the age of balances in receivable accounts.
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule Based on historical data, MBNA estimates the following default rates on its outstanding credit card receivables: 10% 60-90 days old 20% > 90 days old 5% < 60 days old Estimated Default Rate Age
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule Assume MBNA has the following outstanding receivables balances: Rs1,000,000 > 90 days old Rs1,200,000 60-90 days old Rs2,500,000 < 60 days old A/R Balance Age
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule MBNA would compute its ending balance for Allowance for Doubtful Accounts as follows: 20% 10% 5% Estimated Default Rate Rs1,000,000 > 90 days old Rs1,200,000 Rs2,500,000 A/R Balance Totals 60-90 days old < 60 days old AFDA Age
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule MBNA would compute its ending balance for Allowance for Doubtful Accounts as follows: 20% 10% 5% Estimated Default Rate Rs200,000 Rs1,000,000 > 90 days old Rs1,200,000 Rs2,500,000 A/R Balance Rs445,000 Totals Rs120,000 60-90 days old Rs125,000 < 60 days old AFDA Age
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule Note that the aging schedule computes the Allowance for Doubtful Accounts ending balance .
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule Note that the aging schedule computes the Allowance for Doubtful Accounts ending balance . The journal entry to record bad debt expense is for the difference between the AFDA beginning balance and this new ending balance.
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    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule AFDA Beg Bal Rs375,000
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule AFDA Beg Bal Rs375,000 End Bal Rs445,000
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule AFDA Beg Bal Rs375,000 End Bal Rs445,000 Rs70,000 Bad-Debt Expense
    • Accounts Receivable Doubtful Receipts-Percentage of Receivables Method Aging Schedule AFDA Beg Bal Rs375,000 End Bal Rs445,000 Rs70,000 Bad Debt Expense Rs70,000 Allowance for Doubtful Accts Rs70,000
    • Accounts Receivable Sales Returns and Allowances Returns and allowances are handled in the same manner as doubtful collection. An account called Allowance for Sales Returns is set up based on management’s best estimate for returns.
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