Accounting for Receivables Receivables are Assets (Increase side is a debit) that are expected to be converted to cash in the future Classes of Receivables.

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Presentation transcript:

Accounting for Receivables Receivables are Assets (Increase side is a debit) that are expected to be converted to cash in the future Classes of Receivables Trade Accounts Receivable Primary sources are customers Notes Receivable Primary sources are loans to customers and conversion of Accounts Receivable Accrued Receivables: Adjusted at end of period

Trade Accounts Receivable Debit Accounts Receivable and credit Sales (Or Service Revenue) when revenue is earned Debit Cash and credit Accounts Receivable when cash is received If a cash discount is earned by the customer the cash received will be less than the account receivable and the difference is debited to Sales Discount

Sales on Account: Unique Problems Accounts that become uncollectible Two methods used to account for these Specific write-off (simpliest) Simply write off the account when it becomes uncollectible (This method is acceptable whenever write-offs are nominal and consistent over the years Debit Bad Debts Expense XXX Credit Accounts Receivable XXX

Sales on Account: Unique Problems Allowance Method (More complicated) End of year ‘estimate’ of the amount of year end receivables that will not be collectible in the next year (There are several methods used to estimate the uncollectible receivables) Debit: Bad Debt Expense Credit: Allowance for Doubtful Accounts When actual write-offs occur— Debit: Allowance for Doubtful Accounts Credit: Accounts Receivable This method is used for large companies that have larger amounts of bad debt write-offs

Notes Receivable Primary difference is all terms are specified in writing and notes ordinarily are for a longer period of time thereby having an interest charge incorporated Journal entries are: Note is made Debit Notes Receivable XXX Credit Accounts Receivable (Cash) XXX Note is collected Debit Cash XXX Credit Notes Receivable XXX Credit Interest Revenue XX

Accrued Receivables Are the result of end of period adjustments Example: Note is made on November 1, 2007 for 6 months in the amount of $1,000. The note has a 12% interest rate Financial Statements prepared on December 31 would need to reflect the following adjustment Debit Interest Receivable 20 Credit Interest Revenue 20 ($1,000 *.12 * 2/12)