Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 8 Accounting for Receivables

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Types of Receivables Amounts due from individuals and other companies Amounts due from individuals and other companies Accounts receivable: Accounts receivable: Amounts owed by customers on accountAmounts owed by customers on account Expected to be collected within 30 daysExpected to be collected within 30 days Notes receivable: Notes receivable: Supported by formal instruments of creditSupported by formal instruments of credit For periods of 30 days or longerFor periods of 30 days or longer Interest bearingInterest bearing

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Recognizing Accounts Receivable A receivable is recorded when: A receivable is recorded when: Services are providedServices are provided Merchandise is sold on accountMerchandise is sold on account

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Subsidiary Accounts Receivable Ledger Subsidiary accounts receivable ledger is used to track individual customer accounts Subsidiary accounts receivable ledger is used to track individual customer accounts Each entry is effectively posted twice: Each entry is effectively posted twice: To the subsidiary ledgerTo the subsidiary ledger To the general ledger in summary formTo the general ledger in summary form

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Other Transactions Other transactions are posted in a similar manner: Other transactions are posted in a similar manner: Account collectionsAccount collections Interest charged on overdue accountsInterest charged on overdue accounts

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Nonbank Credit Card Sales Nonbank credit card sales are treated as sales on account Nonbank credit card sales are treated as sales on account Unlike bank credit card sales - treated as cash salesUnlike bank credit card sales - treated as cash sales Receipt of cash from nonbank credit cards is recorded as followsReceipt of cash from nonbank credit cards is recorded as follows

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Valuing Accounts Receivable Some receivables will become uncollectible Some receivables will become uncollectible Not reported as assets if no future benefitNot reported as assets if no future benefit Net realizable value: the collectible amountNet realizable value: the collectible amount Receivables are written down to their collectible amount Receivables are written down to their collectible amount By recording bad debt expenseBy recording bad debt expense In the same period as related revenues are recorded: matching of revenues and expensesIn the same period as related revenues are recorded: matching of revenues and expenses

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. The Allowance Method Three features of allowance method: Three features of allowance method: 1.Amount of uncollectible receivables is estimated and recorded at end of period 2.Specific amounts determined uncollectible are written off against the allowance 3.Specific amounts that are recovered are reversed out of allowance and the collection recorded

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. 1. Recording Estimated Uncollectibles Allowance for Doubtful Accounts Deducted from Accounts Receivable in the current assets section of balance sheet Deducted from Accounts Receivable in the current assets section of balance sheet Net Realizable value = Accounts Receivable less Allowance for Doubtful Accounts Net Realizable value = Accounts Receivable less Allowance for Doubtful Accounts

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Two Methods for Estimating the Allowance: Percentage of Sales: Percentage of Sales: Calculates bad debt expense as a percentage of net credit sales Calculates bad debt expense as a percentage of net credit sales Based on past experience and company’s credit policyBased on past experience and company’s credit policy Example: 2% of credit sales of $1,200,000 = $24,000Example: 2% of credit sales of $1,200,000 = $24,000 Better matches revenues and expenses Better matches revenues and expenses Also called the income statement method Also called the income statement method Percentage of Receivables Percentage of Receivables Calculates the percentage of receivables that are estimated to be uncollectible Calculates the percentage of receivables that are estimated to be uncollectible Based on past experience and credit policyBased on past experience and credit policy Can be applied to total receivables balance or amounts grouped by age Can be applied to total receivables balance or amounts grouped by age Requires an aging schedule to be preparedRequires an aging schedule to be prepared Better estimate of net realizable value Better estimate of net realizable value Also called the balance sheet method Also called the balance sheet method

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Comparison of Approaches Income Statement Approach Percentage of Sales Matching Sales Bad Debts Expense Percentage of Receivables Net Realizable Value Allowance for Doubtful Accounts Accounts Receivable Balance Sheet Approach

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. 2. Recording Write-Off of an Uncollectible Account 3. Recovery of an Uncollectible Account

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Recognizing Notes Receivable A written promise to pay a specified amount of money on demand or at a definite time A written promise to pay a specified amount of money on demand or at a definite time If note is received to settle an outstanding account receivable: If note is received to settle an outstanding account receivable: If received for cash, debit is to Cash If received for cash, debit is to Cash Notes are valued at net realizable value Notes are valued at net realizable value Similar process to determine bad debt expense and allowance as for accounts receivableSimilar process to determine bad debt expense and allowance as for accounts receivable

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Recording Interest Formula for calculating interest: Formula for calculating interest: An annual rate of interest - to determine monthly interest, divide by twelveAn annual rate of interest - to determine monthly interest, divide by twelve Separate interest receivable account is used (value of note is not altered) Separate interest receivable account is used (value of note is not altered) Principal Principal of Note X X = Annual AnnualInterestRate Time in Time in Terms of One Year Interest

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Disposing of Notes Receivable A note is honoured when paid in full on its maturity date A note is honoured when paid in full on its maturity date A note is dishonoured if not paid in full at maturity A note is dishonoured if not paid in full at maturity

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Disposing of Notes Receivable 2 A note is dishonoured if not paid in full at maturity A note is dishonoured if not paid in full at maturity

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Management of Receivables Receivables turnover ratio: = Net Credit Sales ÷ Average Receivables Measures the number of times that receivables are collected in a periodMeasures the number of times that receivables are collected in a period Higher the number, the more liquid are receivablesHigher the number, the more liquid are receivables Collection period: = 365 ÷ Receivables Turnover Ratio Calculates the average number of days that accounts receivable are outstandingCalculates the average number of days that accounts receivable are outstanding Operating Cycle: = Days Sales in Inventory + Collection Period Calculates the number of days to complete the operating cycleCalculates the number of days to complete the operating cycle Purchase of inventory through collection of cashPurchase of inventory through collection of cash

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.