1. Receivables
Chapter 9

2. Receivables
Accounts receivable
Notes receivable

3. Design internal controls
Objective 1
Design internal controls
for receivables.

4. Establishing Internal Control
What are some controls over accounts receivable?
Control over
mail receipts
Approval for
write-off
Separation
of duties

5. Use the allowance method to account for uncollectibles
Objective 2
Use the allowance method
to account for uncollectibles
and estimate uncollectibles
by the percent of sales
and aging approaches.

6. The Credit Department
Companies grant credit to customers in order to increase sales.
The credit department evaluates customers who apply for credit cards.

7. Uncollectible Accounts Expense
Allowance method
Direct write-off method

8. Methods for Estimating Uncollectible Expense
Percentage of Sales
Aging of Receivables

9. Percentage of Sales This is also called the income statement approach.
It is based on prior experience of the business.
It is computed as a percentage of credit sales.
It ignores the current balance of the allowance account.
The percentage used is adjusted as needed to reflect collection experience.

10. Percentage of Sales Example
The credit department of Ana’s Boutique estimates (based on prior experience) that 1% of net credit sales are uncollectible.
Net credit sales for the year just ended were $500,000.
What is the adjusting entry?
$500,000 × 1% = $5,000

11. Percentage of Sales Example
Dec 31, 20xx
Uncollectible Account Expense ,000
Allowance for Uncollectible Accounts 5,000
Recorded expense for the year

12. Percentage of Sales Example
What is the effect of this adjusting entry?
Decrease in
Net Income
Decrease in net
Accounts Receivable

13. Aging of Accounts Receivable
This approach is also called the balance sheet approach because it focuses on accounts receivable.
Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.

14. Aging of Receivables Example
Assume that International Hospital’s past collection experience indicates the following:
Length of time % uncollectible days days days days 8.0

15. Aging of Receivables Example
Length Amount %
$1,900, $ 38,000
,000, ,000
, ,000
, ,000
Total $4,100, $143,000
Accounts
Receivable
Allowance for
Uncollectible Accounts

16. Aging of Receivables Example
The allowance account is adjusted to this $143,000 balance:
Assume that the account currently has a credit balance of $100,000.
What is the adjustment?

17. What if the account had a
Aging of Receivables
Uncollectible Account
Expense ,000
Allowance for Uncollectible
Accounts ,000
To record allowance for uncollectibles
What if the account had a
debit balance of $1,000?

18. Aging of Receivables Allowance for Uncollectible Adjustment
1, ,000
Adjusted balance 143,000

19. Comparing the Percentage of Sales and Aging Methods
Allowance Method
Percent of Sales Method
Aging of Accounts Receivable Method
Adjusts Allowance for
Uncollectible Accounts
Adjusts Allowance for
Uncollectible Accounts BY TO
Amount of
Amount of
UNCOLLECTIBLE
ACCOUNT EXPENSE
UNCOLLECTIBLE
ACCOUNTS RECEIVABLE

20. Writing Off Uncollectible Accounts
What happens when it becomes apparent that an account will not be collected?
It must be written off.
How?
Debit Allowance for Uncollectible Accounts.
Credit Accounts Receivable.

21. Recoveries
How is the collection of a previously written- off account recorded?
Debit Accounts Receivable (to reinstate the account).
Credit Allowance for Uncollectible Accounts.
Debit Cash.
Credit Accounts Receivable (to record the collection).

22. Use the direct write-off method to account for uncollectibles.
Objective 3
Use the direct write-off method
to account for uncollectibles.

23. Direct Write-Off Method
Using this method, an account is written off only when it becomes uncollectible.
No allowance account is created.
This method is simple to use.
The balance sheet is overstated.
The income statement is understated.

24. Credit Card and Bankcard Sales
These save retailers the cost of a credit department.
The retailer is required to pay a fee (called a discount) for usage.

25. Credit Card and Bankcard Sales
How would Ana’s Boutique record a $100 credit card sale with a 2% service charge?
Accounts Receivable (credit card) 98
Credit Card Discount
Sales Revenue
To record a credit card sale of $100
less a 2% service charge fee

26. Using a debit card is like
Debit Card Sales
Using a debit card is like
paying with cash.

27. Notes Receivable: an Overview
A note receivable may arise from a sale or may be given in settlement of an account receivable.
The maker pays the payee the maturity value.
The maturity value includes principal plus interest.

28. Notes Receivable: an Overview
Promissory Note
$10, Nov. 30, 2004
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 2005
Plus interest at the annual rate of 10 percent.
__________
Payee

29. Notes Receivable: an Overview
Promissory Note
$10, Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Principal

30. Notes Receivable: an Overview
Promissory Note
$10, Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Interest rate
Date of issue

31. Notes Receivable: an Overview
Promissory Note
$10, Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Maturity date

32. Identifying a Note’s Maturity Date
When the period is given in days…
the maturity date is determined by counting the days from the date of issue.
The date the note was issued is omitted.
The maturity date is counted.

33. Computing Interest on a Note
Principal × Rate × Time = Interest
Compute interest on the note due to Popular Bank.
Principal: $10,000
Interest: 10%
Time: December 1, 20x4, to February 28, 20x5
$10,000 × 10% × 90 ÷ 360 = $250

34. Account for notes receivable.
Objective 4
Account for notes receivable.

35. Recording Notes Receivable
Assume the accounting period ended December 31.
How much interest was earned by the bank as of December 31?
$10,000 × 10% × (31 ÷ 360) = $86.11

36. Recording Notes Receivable
December 31
Interest Receivable
Interest Revenue
To accrue interest on the note

37. Recording Notes Receivable
How does the bank record the collection at maturity?
February 28
Cash ,250.00
Note Receivable ,000.00
Interest Receivable
Interest Revenue
Record interest on note

38. Dishonored Notes Receivable
If the maker of the note fails to pay the maturity value to the new payee, then the original payee legally must pay the bank the amount due.

39. Objective 5
Report receivables
on the balance sheet.

40. Reporting Receivables
Some companies report a single amount for its current receivables in the body of the balance sheet.
They use a note to the financial statements to give more details.

41. Use the acid-test ratio and days’ sales in receivables to evaluate
Objective 6
Use the acid-test ratio and days’
sales in receivables to evaluate
a company.

42. Acid-Test Ratio This is a stringent test of liquidity.
It measures the entity’s ability to pay its current liabilities immediately.
Acid-test ratio = (Cash + Short-term investments
+ Net current receivables) ÷ Total current liabilities

43. Days’ Sales in Receivables
It is a measure of the time it takes to collect receivables.
A smaller number indicates a quick conversion to cash.

44. Days’ Sales in Receivables
One day’s sales = Net sales ÷ 365 days
Days’ sales in average accounts receivable =
Average net accounts receivable ÷ One day’s sales

45. End of Chapter 9