DISPOSING OF ACCOUNTS RECEIVABLE

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Presentation transcript:

DISPOSING OF ACCOUNTS RECEIVABLE To accelerate the receipt of cash from receivables, owners frequently: 1. sell to a factor, such as a finance company or a bank, and 2. make credit card sales.

DISPOSING OF ACCOUNTS RECEIVABLE A factor buys receivables from businesses for a fee and collects the payments directly from customers. Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit. Retailers can receive cash more quickly from the credit card issuer.

Account Titles and Explanation To record VISA credit card sales. BANK CARD SALES GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 31 Cash 965 35 1,000 Credit Card Expense ($1,000 x 3.5%) Sales To record VISA credit card sales. Anita Ferreri purchases a number of compact discs for her restaurant from Karen Kerr Music Co. for $1,000 using her Royal Bank VISA card. The service fee that the Royal charges is 3.5 percent.

Account Titles and Explanation NON-BANK CARD SALES GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 31 Accounts Receivable 475 25 500 Credit Card Expense ($500 x 5%) Sales To record American Express credit card sales. Kerr Music Co. accepts an AMERICAN EXPRESS card for a $500 sale. The service fee that AMERICAN EXPRESS charges is 5 percent.

NOTES RECEIVABLE A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. The party making the promise is the maker. The party to whom payment is made is called the payee.

ILLUSTRATION 9-8 FORMULA FOR CALCULATING INTEREST The basic formula for calculating interest on an interest-bearing note is: The interest rate specified on the note is an annual rate of interest. Face Value of Note Annual Interest Rate Time in Terms of One Year X =

HONOUR OF NOTES RECEIVABLE A note is honoured when it is paid in full at its maturity date. Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4.5% interest-bearing note, due in 4 months, on September 30. Wolder collects the maturity value of the note from Higley on September 30.

DISHONOUR OF NOTES RECEIVABLE A dishonoured note is a note that is not paid in full at maturity. A dishonoured note receivable is no longer negotiable. Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable.