Chapter 9 Receivables and Payables HFT 2401 Chapter 9 Receivables and Payables

Receivables Accounts Receivable Very Liquid Current Assets – Turn to cash in 30 to 60 days Trade Receivables – From the “ordinary” course of business – usually unsecured Guest Ledger City Ledger Creditor – the holder of the receivable Debtor – the one who owes the money

Collection The sale is not “complete” until the cash is in the bank Uncollectible accounts – bad debt losses Credit checking procedures Collections Courtesy letters Phone calls Collection agency / attorney

Uncollectible Accounts Direct Write Off Method Write off at the time it is deemed uncollectible Allowance Method Accrues a percentage based on history Preferred as it is more applicable to the matching principle Carrying value – net on the books Percentage of sales method – credit versus cash sales

Receivables Aging Usually done in 30 day increments Used on a historical basis to determine allowance entry Also used for cash forecasting purposes Used by credit managers to determine continued credit worthiness of account

Notes Receivable Written promises to receive cash in the future Usually interest bearing Can be secured by an asset Maker – the one promising to pay Payee – the one who is owed Interest = Principal x Rate x Time

Notes Receivable Accounts receivable can be converted Dishonored notes – written off the books Discounting – Sell the value of the note to a third party for collection Also called factoring Increase cash flow Discount = Maturity Value x Discount x Discount Period

Payables Accounts Payable – Unsecured debt resulting from the ordinary course of business Invoices Usually due in 30 days or less Cash discounts can be offered Notes Payable – Secured debt Non-interest bearing Interest bearing Interest = Principal x rate x time

Homework Problem 7 Problem 8 Problem 13