1. ACCOUNTING FOR RECEIVABLES
CHAPTER 9
ACCOUNTING FOR RECEIVABLES

2. RECEIVABLES
The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.
Three major classes of receivables are:
i. Accounts Receivable (due 30 days)
ii. Notes Receivable (due days)
iii. Other Receivables

3. ACCOUNTS RECEIVABLE
The three primary accounting problems associated with accounts receivable are:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.

4. 1. RECOGNIZING ACCOUNTS RECEIVABLE
When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.
Date
Particulars
Debit
Credit
July 1
Accounts Receivable – Adorable Junior 1,000
Sales ,000

5. 1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)
When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited.
Date
Particulars
Debit
Credit
July 5
Sales Returns and Allowances
Accounts Receivable

6. 1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)
When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited.
Date
Particulars
Debit
Credit
July 31
Cash ($1,000 – $100)
900
900
Accounts Receivable

7. 1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)
When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.
Date
Particulars
Debit
Credit
July 31
Accounts Receivable (18% or 1.5% per month on $900)
13.50
13.50
Interest Revenue

8. 2. VALUING ACCOUNTS RECEIVABLE
To ensure that receivables are not overstated, they are stated at their net realizable value.
Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

9. ACCOUNTS RECEIVABLE (cont.)
2. VALUING
ACCOUNTS RECEIVABLE (cont.)
Two methods of accounting for uncollectible accounts are:
1. Allowance method
2. Direct write-off method

10. DIRECT WRITE-OFF METHOD
Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense.
No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet.

11. DIRECT WRITE-OFF METHOD
Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.
Why is this a selling operating expense?
Date
Particulars
Debit
Credit
Jan. 12
Bad Debt Expense
200
200
Accounts Receivable – E. Schaefer

12. THE ALLOWANCE METHOD (2 Steps) Achtung !
The allowance method is required when bad debts are deemed to be material in amount.
Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred.
Achtung !
Why?

13. THE ALLOWANCE METHOD Step 1
Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period.
Date
Particulars
Debit
Credit
Dec. 31
Bad Debts Expense
24,000
24,000
Allowance for Doubtful Accounts

14. ADORABLE JUNIOR GARMET Balance Sheet (partial)
Current assets
Cash $ 14,800
Accounts receivable $200,000
Less: Allowance for doubtful accounts , ,000
Why not just show the Net Realizable Value, and omit the rest?
Net Realizable Value

15. THE ALLOWANCE METHOD Step 2
Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.
Date
Particulars
Debit
Credit
Mar. 1
Allowance for Doubtful Accounts
500
500
Accounts Receivable - Nadeau

16. THE ALLOWANCE METHOD
When there is recovery of an account that has been written off:
Reverse the entry made to write off the account
Date
Particulars
Debit
Credit
July 1
Accounts Receivable – Nadeau
Allowance for Doubtful Accounts
Record the collection in the usual manner.
Date
Particulars
Debit
Credit
July 1
Cash
Accounts Receivable

17. BASES USED FOR THE ALLOWANCE METHOD
Companies use either of two methods in the estimation of uncollectible accounts:
Percentage of sales
Percentage of aged receivables
Both bases are GAAP; the choice is a management decision.
Achtung !

18. A. PERCENTAGE OF SALES BASIS
In the percentage of sales basis, management establishes what amount of net CREDIT sales are expected to be uncollectible (usually from past experience).
Bad Debt Expense is then determined by applying the percentage to the sales base of the current period. The TOTAL amount is charged to Bad Debt. Observe…
This basis better matches expenses with revenues.
Date
Particulars
Debit
Credit
Dec. 31
Bad Debt Expense ,000
Allowance for Doubtful Accounts 3,000

19. B. PERCENTAGE OF AGED RECEIVABLES BASIS
Under this method, management estimates what the TOTAL value of bad debt currently is by applying a percentage to the actual, existing accounts receivable balances at the end of the period.
This percentage can be applied to
The total receivable balance, or
To accounts receivable balances grouped by age. (see pg 429)

20. B. PERCENTAGE OF AGED RECEIVABLES BASIS (cont.)
The amount of the adjusting entry is the difference between the required balance in the allowance account, and the current balance.
This basis produces the better estimate of net realizable value of receivables. Observe…
Desired Balance

21. B. PERCENTAGE OF AGED RECEIVABLES BASIS (cont.)
So, if the balance in the Allowance account is already $2,200, then the adjusting entry to bring the Allowance up to the present estimated of Net Realizable Receivables is…
Date
Particulars
Debit
Credit
Dec. 31
Bad Debt Expense ($3,245 - $2,200) ,045
Allowance for Doubtful Accounts 1,045

22. Do the following starting on page 445:
BE9-1 to 6
E9-2
E9-3
P9-2A
P9-3A

23. 3. 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.

24. 3. DISPOSING OF ACCOUNTS RECEIVABLE (cont.)
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.

25. CREDIT CARD SALES
Three parties are involved when credit cards are used in making retail sales:
1. the credit card issuer,
2. the retailer, and
3. the customer.
The retailer pays the credit card issuer a percentage fee of the invoice price for its services.

26. BANK CARD SALES
Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailer.
These cards are issued by banks.
Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.

27. BANK CARD SALES
We purchase a CDs for our restaurant from Karen Kerr Music Co. for $1,000 using our Royal Bank VISA card.
The service fee that the Royal charges is 3.5 percent.
What other account does this resemble?
Date
Particulars
Debit
Credit
July 31
Cash
Credit Card Expense ($1,000 x 3.5%)
Sales ,000

28. 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.

29. IMPORTANT TERMS Interest rate Face Value Term Maturity
The cost of borrowing others’ money. It is an expense, not the repayment of debt
Face Value
The price of a note or bond, written on the actual contract (note)
Term
The length of the note or bond before it is due
Maturity
When the note/bond’s face value is due, along with any outstanding interest

30. IMPORTANT TERMS Interest is always calculated as follows: Interest
Expense
Face
Value
Interest
Rate = X

31. NOTES RECEIVABLE
We now will look at the following three procedures for dealing with notes:
Acquisition
Adjustment/valuation
Disposal/termination
Note: these three steps are similar to many things we will look at this semester. Best to look for trends and processes.

32. RECOGNIZING NOTES RECEIVABLE
Acquisition
Wilma Company receives a $1,000, 6% promissory note, due in two months (July 1) from Brent Company to settle an open account.
Date
Particulars
Debit
Credit
May 1
Notes Receivable
1,000
1,000
Accounts Receivable – Brent Company

33. VALUING NOTES RECEIVABLE
Like accounts receivable, short-term notes receivable are reported at their net realizable value.
The notes receivable allowance account is Allowance for Doubtful Notes.

34. VALUING NOTES RECEIVABLE Adjustment/Valuation
If Wilma company adjusts monthly, the journal entry will look like this:
If they do not, not entry will be recorded until the note matures and pays interest.
Date
Particulars
Debit
Credit
May 31
Interest Receivable 5 5
Interest Revenue

35. VALUING NOTES RECEIVABLE Disposal/Termination
If Wilma company adjusts monthly, the journal entry will look like this:
Date
Particulars
Debit
Credit
May 31
Cash
1,010 5
Interest Receivable 5
Interest Revenue
1,000
Notes Receivable

36. VALUING NOTES RECEIVABLE Disposal/Termination
If Wilma company does NOT adjust monthly, the journal entry will look like this:
Date
Particulars
Debit
Credit
May 31
Cash
1,010 10
Interest Receivable
1,000
Notes Receivable

37. 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.
Date
Particulars
Debit
Credit
Sept. 30
Accounts Receivabl
1,010
1,000
Notes Receivable 10
Interest Revenue

38. BALANCE SHEET PRESENTATION OF RECEIVABLES
Both the gross amount of receivables and the allowance for doubtful accounts should be reported.
Why?

39. USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Financial ratios are calculated to evaluate the short-term liquidity of a company.
Recall these ratios:
1. current ratio,
2. acid test (quick) ratio,
3. receivables turnover, and the
4. A/R collection period (in days).

40. Do the following starting on page 449:
BE9-7 to 12
P9-8A
P9-10A