1. | Accounting for receivables 1

2. | Receivables represent claims from money, goods, services and other noncash assets from other firms. – Often supported by a sales invoice – Notes receivables are supported by formal promissory notes. – Trade receivables describe amounts owed by the company for goods and services sold in the normal course of the business. 2

3. | Accounting for receivables Nontrade receivables arise from different sources such as: – Tax refunds, – Contracts, – Investees, – Finance receivables – dividends, interest, – Installment notes, – Sale of assets, – Advances to employees. 3

4. | KQ-Receivables for 2010 4

5. | Recognition and measurement of AR AR are recognized only when the criteria for recognition are fulfilled. They are valued at the original exchange price between the firm and the outside party, less adjustments for cash discounts, sales returns, and allowances and uncollectible amounts yielding the net realizable value. 5

6. | Discounts A trade discount reduces the list sales price to the net sales price charged to the customer. A cash (sales) discount can only be taken if the customer makes the payment within a specified time period. There are two methods to account for this:  Gross method  Net method (not commonly used) 6

7. | Accounting for bad debts Bad debts occur when customers do not pay for items or services purchased on credit. Bad debts are uncollectible accounts receivable. Bad debt expense is reported as a selling or general and administrative expense. Accounts receivable are reported on the balance sheet at net realizable value; that is, the expected cash value.

8. | Methods of Accounting for bad debts 1. Direct Write off Method. Involves debiting Bad Debts Expense accounts and crediting accounts receivable in the period in which the firm finally realizes that the accounts are uncollectible. 2.The Allowance Method A company estimates the total amount of its uncollectible accounts at the end of every accounting period. It satisfies the matching principle. 8

9. | Estimating doubtful debts Two methods can be applied to estimate the doubtful debt expense at the end of the year. – a) Income statement approach (The Percentage of credit/total sales) – b) Balance Sheet approach (Percentage of accounts receivable) – Under the balance sheet approach there are 2 methods that can be used. Percentage of accounts receivable and Ageing of accounts receivable 9

10. | (a) Income Statement Approach The estimated bad debts is determined by multiplying current period sales by an established doubtful debt percentage based on past history and current economic trends. 10

11. | (b) Balance Sheet Approach The focus is on the collectability of accounts receivable to make an estimate of uncollectible accounts. The desired allowance for uncollectible accounts using a percentage of accounts receivable is computed. 11

12. | Balance Sheet Approach (i) Percentage of accounts receivable – The total accounts receivable for P Limited are Sh 50,000 and it is estimated that 3% of those accounts will be uncollectible, the allowance account already has a Sh 600 credit balance. – Compute the allowance for doubtful debts for the period. 12

13. | Balance Sheet Approach (ii) Aging Receivables – The most commonly used method for establishing an allowance based on outstanding receivables involves aging receivables. – Individual accounts are analyzed to determining those not yet due and those past due. 13

14. | Ageing of Receivables Compare desired uncollectible amount with the existing balance in the allowance account. Compute the desired uncollectible amount Each grouping has different likelihood of being uncollectible Year end accounts Receivable is broken down into age classifications

15. | Ageing schedule 15

16. | Ageing schedule 16

17. | Presentation of Receivables in the Financial Statements Current receivables may be grouped in the balance sheet in the following classes: 1.Notes receivable—trade debtors 2.Accounts receivable—trade debtors 3.Other receivables It is possible to combine trade notes and accounts receivable into a single amount. Restrictions on any receivables should be disclosed.

18. | Example 2 You are required to show the debtors balance and how this balance will be shown in the statement of financial position given the following information: 18 Sh. Provision for doubtful debt (established at the end of the month)640,000 Credit sales3,800,000 Returns inwards120,000 Interest charged to credit customers200,500 Discounts allowed100,900 Receipts from credit customers3,306,400 Bad debts written off80,700 Creditors ledger credits transferred to debtors ledger214,600 Debtors balance b/f2,100,000

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