1. PRINCIPLES OF FINANCIAL ACCOUNTING
WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 8
Accounting for Receivables
Prepared by:
Debbie Musil
Kwantlen Polytechnic University

2. Accounting for Receivables
Accounts receivable
Recognition and valuation
Notes receivable
Recognition and disposition
Statement presentation and management of receivables
Presentation
Analysis
Accelerating cash receipts from receivables
Copyright John Wiley & Sons Canada, Ltd.

3. Chapter 8: Accounting for Receivables
Study Objectives
Record accounts receivable transactions.
Calculate the net realizable value of accounts receivable and account for bad debts.
Account for notes receivable.
Demonstrate the presentation, analysis and management of receivables.
Copyright John Wiley & Sons Canada, Ltd.

4. Copyright John Wiley & Sons Canada, Ltd.
Types of Receivables
Amounts owed to a company from individuals and other companies
Accounts receivable:
Amounts owed by customers on account
Expected to be collected within 30 days
Notes receivable:
Supported by formal instruments of credit (a written note)
For periods of 30 days or longer
Interest bearing
Copyright John Wiley & Sons Canada, Ltd.

5. Recognizing Accounts Receivable
A receivable is recorded when:
Services are provided
Merchandise is sold on account
Copyright John Wiley & Sons Canada, Ltd.

6. Subsidiary Accounts Receivable Ledger
Used to track individual customer accounts
Each entry is effectively posted twice:
To the subsidiary ledger
To the general ledger in summary form
Copyright John Wiley & Sons Canada, Ltd.

7. Copyright John Wiley & Sons Canada, Ltd.
Interest Revenue
If a customer does not pay in full within a specified period, financing charges (interest) is added to the balance due
Recognized as interest revenue
Copyright John Wiley & Sons Canada, Ltd.

8. Nonbank Credit Card Sales
Nonbank credit card sales are treated as sales on account
Unlike bank credit card sales - treated as cash sales
Receipt of cash from nonbank credit cards is recorded as follows
Copyright John Wiley & Sons Canada, Ltd.

9. Chapter 8: Accounting for Receivables
Study Objectives
Record accounts receivable transactions.
Calculate the net realizable value of accounts receivable and account for bad debts.
Account for notes receivable.
Demonstrate the presentation, analysis and management of receivables.
Copyright John Wiley & Sons Canada, Ltd.

10. Valuing Accounts Receivable
Some receivables will become uncollectible
Not reported as assets if no future benefit
Net realizable value: the collectible amount
Receivables are written down to their collectible amount
By recording bad debt expense
In the same period as related revenues are recorded
Key issue is to estimate the amount that will not be collected
Copyright John Wiley & Sons Canada, Ltd.

11. Copyright John Wiley & Sons Canada, Ltd.
The Allowance Method
Three features of allowance method:
Amount of uncollectible receivables is estimated and recorded at end of period
Actual uncollectibles are written off against the allowance when it is determined the specific account is uncollectible
If an account previously written off is recovered the write off is reversed and the collection recorded
Copyright John Wiley & Sons Canada, Ltd.

12. Allowance for Doubtful Accounts
Deducted from Accounts Receivable in the current assets section of balance sheet
Net realizable value
= Accounts Receivable less Allowance for Doubtful Accounts
Copyright John Wiley & Sons Canada, Ltd.

13. Estimating the Allowance: Percentage Receivables Approach
Calculates the percentage of receivables that are estimated to be uncollectible
Based on past experience and credit policy
Can be applied to total receivables balance or amounts grouped by age
Requires an aging schedule to be prepared
Better estimate of net realizable value
Also called the balance sheet method
Copyright John Wiley & Sons Canada, Ltd.

14. 1. Recording Estimated Uncollectibles
Estimated amount of uncollectible accounts is:
Debited to an expense account – bad debts expense
Credited to a contra asset account – allowance for doubtful accounts
Copyright John Wiley & Sons Canada, Ltd.

15. 2. Recording Write-Off of Uncollectible Accounts
Amount written-off is debited to the allowance account
Bad debt expense is not increased
Expense previously recognized when allowance initially recorded
Copyright John Wiley & Sons Canada, Ltd.

16. 3. Recovery of an Uncollectible Account
If cash is collected from a customer after the account has been written off:
1. Reverse write-off entry to restore customer’s account
2. Record collection of the account receivable in the usual way
Copyright John Wiley & Sons Canada, Ltd.

17. Chapter 8: Accounting for Receivables
Study Objectives
Record accounts receivable transactions.
Calculate the net realizable value of accounts receivable and account for bad debts.
Account for notes receivable.
Demonstrate the presentation, analysis and management of receivables.
Copyright John Wiley & Sons Canada, Ltd.

18. Copyright John Wiley & Sons Canada, Ltd.
Notes Receivable
Credit may be granted in exchange for a promissory note:
A formal credit instrument
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
Copyright John Wiley & Sons Canada, Ltd.

19. Recognizing Notes Receivable
If note is received to settle an outstanding account receivable:
If received for cash, credit is to Cash
Notes are valued at net realizable value
Similar process to determine bad debt expense and allowance as for accounts receivable
Copyright John Wiley & Sons Canada, Ltd.

20. Copyright John Wiley & Sons Canada, Ltd.
Recording Interest
Formula for calculating interest:
An annual rate of interest
Separate interest receivable account is used (value of note is not altered)
Copyright John Wiley & Sons Canada, Ltd.

21. Disposing of Notes Receivable
A note is honoured when paid in full on its maturity date
Amount due is principal + interest
Copyright John Wiley & Sons Canada, Ltd.

22. Disposing of Notes Receivable 2
A note is dishonoured if not paid in full at maturity
Note is no longer negotiable
Payee still has a valid claim against maker
Balance is transferred to Accounts Receivable in hopes of collection
Copyright John Wiley & Sons Canada, Ltd.

23. Chapter 8: Accounting for Receivables
Study Objectives
Record accounts receivable transactions.
Calculate the net realizable value of accounts receivable and account for bad debts.
Account for notes receivable.
Demonstrate the presentation, analysis and management of receivables.
Copyright John Wiley & Sons Canada, Ltd.

24. Statement Presentation
Each major type of receivable is identified on the balance sheet or in the notes
Generally reported separately in the current or noncurrent sections of the balance sheet
Disclose the net amount of receivables
Gross amount and the allowance for doubtful accounts must also be disclosed, either on balance sheet or in notes
Copyright John Wiley & Sons Canada, Ltd.

25. Analysis of Receivables
Management monitors relationship between sales, receivables and cash
Receivables should increase with sales
Unusual increase could signal trouble
Receivables ratios:
Used to help determine if management of receivables is helping or hurting liquidity
Copyright John Wiley & Sons Canada, Ltd.

26. Analysis of Receivables 2
Receivables turnover ratio:
= Net Credit Sales ÷ Average Receivables
Measures the number of times that receivables are collected in a period
Higher the number, the more liquid are receivables
Copyright John Wiley & Sons Canada, Ltd.

27. Analysis of Receivables 3
Collection period:
= Days in Year ÷ Receivables Turnover Ratio
Calculates 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 cycle
Purchase of inventory through collection of cash
Copyright John Wiley & Sons Canada, Ltd.

28. Accelerating Cash From Receivables
To shorten the cash-to-cash operating cycle
Loans secured by receivables:
Borrow from bank using receivables as collateral
Sale of receivables:
Factoring: sell receivables to a finance company or bank (called a factor)
Copyright John Wiley & Sons Canada, Ltd.

29. Copyright John Wiley & Sons Canada, Ltd.
Copyright © 2014 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.
Copyright John Wiley & Sons Canada, Ltd.