Receivables
Accounts Receivable <ul><li>Amounts due from customers for credit sales. </li></ul><ul><li>Credit sales require: </li></ul...
Credit Card Sales <ul><li>Customers’ credit is evaluated by the credit card issuer </li></ul><ul><li>Sales increase by pro...
Bank Credit Card Sales <ul><li>With bank credit cards, the seller deposits the credit card sales receipt in the bank just ...
Example <ul><li>On August 15th, TechCom made a bank credit card sale of $100 to a customer.  The bank credits TechCom’s ch...
Valuing Accounts Receivable <ul><li>There are two methods used to account for receivables that customers do not pay.   </l...
Allowance Method <ul><li>At the end of each period, estimate the total bad debts expected to be realized from that period’...
Writing Off Bad Debt <ul><li>With the allowance method, when an account is determined to be uncollectible, the debit goes ...
Recovery of Bad Debt <ul><li>Subsequent collections require that the original write-off entry be reversed before the cash ...
Estimating Bad Debt Expense - % of Sales Method <ul><li>Also known as the Income Statement Method  </li></ul><ul><li>B ad ...
Estimating Bad Debt Expense - % of Accounts Receivable <ul><li>Also known as the Balance Sheet method </li></ul><ul><li>De...
Example Desired balance in Allowance for Doubtful Accounts. 2,000
Aging of Accounts Receivable Method <ul><li>Year-end Accounts Receivable is broken down into age classifications. </li></u...
Example Using estimated bad debt percentages, DeCor would calculate the estimated uncollectible amount as follows: x =
Example DeCor’s unadjusted balance in the allowance account is a debit of $200. The previous computation shows the desired...
Direct Write-Off Method <ul><li>Accounts for bad debts from an uncollectible account receivable at the time it is determin...
Notes Receivable <ul><li>A note is a written promise to pay a specific amount at a specific future date. </li></ul><ul><li...
Notes Receivable <ul><li>Record the receipt of a $1,000, 12%, 90-day note in exchange for goods. </li></ul><ul><li>Note: N...
Interest Computation If the note is expressed in days, base a year on 365 days. Even for maturities less than 1 year, the ...
Receipt of Note <ul><li>At the maturity date, the following journal entry is required: </li></ul>(=Maturity value) Recogni...
End-of-Period Adjustments <ul><li>When a note receivable is outstanding at the end of an accounting period, the company mu...
Subsequent Collection <ul><li>At maturity, remove the original note receivable balance, the interest accrued at year-end a...
Dishonouring a Note <ul><li>If a note is not paid on the date of maturity, a journal entry must be made </li></ul><ul><li>...
Accounts Receivable Turnover   <ul><li>Accounts receivable turnover indicates how often the company converted its average ...
Days Sales Uncollected   <ul><li>Days sales uncollected indicates how much time is likely to pass before we receive cash r...
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Receivables

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Receivables

  1. 1. Receivables
  2. 2. Accounts Receivable <ul><li>Amounts due from customers for credit sales. </li></ul><ul><li>Credit sales require: </li></ul><ul><ul><li>Maintaining a separate account receivable for each customer. </li></ul></ul><ul><ul><li>Accounting for bad debts that result from credit sales. </li></ul></ul>
  3. 3. Credit Card Sales <ul><li>Customers’ credit is evaluated by the credit card issuer </li></ul><ul><li>Sales increase by providing purchase options to the customer </li></ul><ul><li>The risks of extending credit are transferred to the credit card issuer </li></ul><ul><li>Cash collections are speeded up. </li></ul>
  4. 4. Bank Credit Card Sales <ul><li>With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer’s cheque. </li></ul><ul><li>The bank increases the balance in the company’s chequing account. </li></ul><ul><li>The company usually pays a fee of 2% to 5% for the service. </li></ul>
  5. 5. Example <ul><li>On August 15th, TechCom made a bank credit card sale of $100 to a customer. The bank credits TechCom’s chequing account upon receipt of the credit card slip and charges a processing fee of 4%. </li></ul>
  6. 6. Valuing Accounts Receivable <ul><li>There are two methods used to account for receivables that customers do not pay. </li></ul><ul><li>Allowance method—at the end of each accounting period, bad debts expense is estimated and recorded. </li></ul><ul><ul><li>Method satisfies matching principle—expense is charged in period of related sale. </li></ul></ul><ul><ul><li>Accounts Receivable are reported at their estimated realizable value (A/Rec less the allowance account). </li></ul></ul><ul><ul><li>Entry to write-off an uncollectible: debit Allowance for Doubtful Accounts, credit Accounts Receivable. </li></ul></ul><ul><ul><li>Writing off an uncollectible does not change the estimated realizable value of Accounts Receivable. </li></ul></ul>
  7. 7. Allowance Method <ul><li>At the end of each period, estimate the total bad debts expected to be realized from that period’s sales. </li></ul><ul><ul><li>Entry: debit Bad Debt Expense, credit a contra-asset account called the Allowance for Doubtful Accounts. </li></ul></ul>
  8. 8. Writing Off Bad Debt <ul><li>With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts. </li></ul>
  9. 9. Recovery of Bad Debt <ul><li>Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded. </li></ul>
  10. 10. Estimating Bad Debt Expense - % of Sales Method <ul><li>Also known as the Income Statement Method </li></ul><ul><li>B ad debts expense is calculated as a percentage of credit sales. </li></ul>
  11. 11. Estimating Bad Debt Expense - % of Accounts Receivable <ul><li>Also known as the Balance Sheet method </li></ul><ul><li>Desired credit balance in Allowance for Doubtful Accounts is calculated </li></ul>
  12. 12. Example Desired balance in Allowance for Doubtful Accounts. 2,000
  13. 13. Aging of Accounts Receivable Method <ul><li>Year-end Accounts Receivable is broken down into age classifications. </li></ul><ul><li>Each age grouping has a different likelihood of being uncollectible. </li></ul><ul><li>Compute a separate allowance for each age grouping. </li></ul>
  14. 14. Example Using estimated bad debt percentages, DeCor would calculate the estimated uncollectible amount as follows: x =
  15. 15. Example DeCor’s unadjusted balance in the allowance account is a debit of $200. The previous computation shows the desired balance is $2,290. Therefore, the adjusting entry is for $2,290 + 200 = $2,490.
  16. 16. Direct Write-Off Method <ul><li>Accounts for bad debts from an uncollectible account receivable at the time it is determined to be uncollectible. </li></ul><ul><li>Entry to write-off an uncollectible: debit Bad Debt Expense, credit Accounts Receivable. </li></ul><ul><li>This method violates matching principle—frequently results in expense being charged in period different from revenue. </li></ul><ul><li>Materiality principle permits use of this method when bad debts expenses are very small in relation to other financial statement items such as sales and net income. </li></ul>
  17. 17. Notes Receivable <ul><li>A note is a written promise to pay a specific amount at a specific future date. </li></ul><ul><li>Promissory notes are notes payable to the maker of the note and notes receivable to the payee of the note. </li></ul><ul><li>Notes receivable are generally preferred by creditors over accounts receivable. </li></ul>
  18. 18. Notes Receivable <ul><li>Record the receipt of a $1,000, 12%, 90-day note in exchange for goods. </li></ul><ul><li>Note: No interest is recorded on the day the note is received. </li></ul>
  19. 19. Interest Computation If the note is expressed in days, base a year on 365 days. Even for maturities less than 1 year, the rate is annualized.
  20. 20. Receipt of Note <ul><li>At the maturity date, the following journal entry is required: </li></ul>(=Maturity value) Recognizes revenue earned Original face value
  21. 21. End-of-Period Adjustments <ul><li>When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income. </li></ul><ul><li>The accrued interest is equal to the number of days from the start of the note to the end of the year. </li></ul><ul><li>Example - $3,000, 12% note dated December 16th. Due: June 16th </li></ul>($3,000 x 12% x 15/365)
  22. 22. Subsequent Collection <ul><li>At maturity, remove the original note receivable balance, the interest accrued at year-end and record the interest earned in the current year. </li></ul><ul><li>Example - $3,000, 12% note dated December 16 th . Due: June 16 th </li></ul>
  23. 23. Dishonouring a Note <ul><li>If a note is not paid on the date of maturity, a journal entry must be made </li></ul><ul><li>Debit Accounts Receivable for maturity value, credit Note Receivable for face amount and credit Interest Earned for the interest amount. </li></ul><ul><li>If account receivable remains uncollected, will be written-off. </li></ul>
  24. 24. Accounts Receivable Turnover <ul><li>Accounts receivable turnover indicates how often the company converted its average accounts receivable balance into cash during the year. </li></ul><ul><li>Calculated as: </li></ul><ul><ul><li>Net sales ÷ Average accounts receivable </li></ul></ul>
  25. 25. Days Sales Uncollected <ul><li>Days sales uncollected indicates how much time is likely to pass before we receive cash receipts from credit sales equal to the current amount of accounts receivable. </li></ul><ul><li>Calculated as: </li></ul><ul><li>Accounts Receivable ÷ Net Sales X 365 </li></ul>

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