1. Accounting for Receivables
Chapter 8
Accounting for Receivables

2. Short-Term Investments & Receivables
Chapter Objectives
1. Accounts Receivables and Notes Receivables
2. Using Accounting for Decision Making
Short-Term Investments & Receivables

3. Accounts Receivable and Notes Receivable
Receivables: monetary claims against business or individuals from selling goods, providing services or lending money (i.e., accounts receivable, notes receivable, interest receivable).
Short-Term Investments & Receivables

4. Short-Term Investments & Receivables
A. Accounts Receivable (A/R) (trade receivables): An oral promise for future cash receipt as a result of sales; a current asset.
The accounts receivable account in the general ledger serves as a control account which records the total amounts of receivable from all customers. Companies also keep subsidiary ledger accounts receivable for each customer.
Short-Term Investments & Receivables

5. A. Accounts Receivable (Continued)
General Ledger
A/R
Bal. 10,000
Subsidiary Ledger
A/R
A. Company
Bal. 3,000
B. Company
Bal. 4,000
C. Company
Total $10,000
Journal Entries:
A/R - A Company 3000
Sales Revenue 3000
A/R - B Company 4000
Sales Revenue 4000
A/R - C Company 3000
Short-Term Investments & Receivables

6. Uncollectible Accounts (Bad Debts)
The benefit of allowing customers to purchase on credit (or on account) is the increase of sales.
The risk associates with this practice is the cost of uncollectible accounts.
Short-Term Investments & Receivables

7. Short-Term Investments & Receivables
The Accounting for the Uncollectible Accounts (Bad Debt (B/D) Expense):
Current Practice: Estimate the B/D expense at the end of the period and recognize the expense (FASB No.5)
Adjusting entry for B/D expense:
Estimated B/D expense = $2,000
12/31 B/D Exp. (or Uncollectible Accounts Expense) 2000
Allowance for Uncollectible Accounts 2000
Writing off uncollectible accounts:
When $200 B/D actually occurred:
Allowance for uncollectible Accounts 200
A/R - A Company 200
Short-Term Investments & Receivables

8. The Accounting for the Uncollectible Accounts (Continued)
If $100 of the B/D recovered:
A/R 100
Allowance for Uncollectible Accounts 100
Cash 100
The current practice is complied with the matching principle.
The direct write-off method (recognize the B/D expense when it occurs) is NOT recommended.
Short-Term Investments & Receivables

9. Estimation of B/D Expense:
1. Percentage of net credit sales (I/S approach)
2. Percentage of accounts receivable (B/S approach)
3. Aging of accounts receivable (B/S approach using individual account information)
Short-Term Investments & Receivables

10. Estimation of B/D Expense Example:
1. Net credit sales = $20,000
Estimated B/D expense = 2%
12/31 B/D Expense 400
Allowance for uncollectible accounts 400
Short-Term Investments & Receivables

11. Estimation of B/D Expense Example: (Continued)
2. Percentage of A/R:
A/R Balance = $50,000
Estimated B/D expense = 1%
Balance of the Allowance for uncollectible accounts prior to the adjustment= $300
The adjusted balance of the allowance for uncollectible accounts = $50,000 * 1% = $500
Bad Debt Expense = $ = 200
B/D expense
Allowance for uncollectible accounts
Short-Term Investments & Receivables

12. Estimation of B/D Expense Example: (Continued)
3. Aging-of-A/R: The balance of the allowance account prior to adjustment= $100
B/D expense = $ = 340
12/31 adjusting entry:
B/D Expense
Allowance for uncollectible accounts
Short-Term Investments & Receivables

13. Estimation of B/D Expense
All three estimation methods are acceptable for the financial reports. In practice, some companies use the percentage of sales method for the interim statements (i.e., monthly or quarterly reports), but use the aging of accounts receivable method for the annual financial reports.
Short-Term Investments & Receivables

14. Short-Term Investments & Receivables
4/22/2017
Credit-Card Sales
Benefits of credit-card sales to
a. Customers: the convenience of purchase and payment.
b. Companies (the sellers):
1)no risk of uncollectible accounts;
2)no need to do a credit check;
Short-Term Investments & Receivables

15. Credit-Card Sales (Continued)
3) increase of sales;
4) receive cash quickly.
c. Credit-Card Companies: charge 2% to 6% of service charge to the seller (source: Weygandt, etc. textbook).
Disadvantages of credit-card sales to customers, companies (the sellers) and the credit-card companies:
Short-Term Investments & Receivables

16. Short-Term Investments & Receivables
Accounting for Credit Card Sales – Credit Cards Issued by a Financial Company:
Example: Suppose you shopped at the Gap and paid $100 for a sweater using a VISA card. Gap’s entry to record the VISA card sale, subject to 2% VISA discount (the service charge by VISA):
Cash
Service Charge Expense
Sales Revenue
Short-Term Investments & Receivables

17. B. Accounting for Notes Receivable
For an example of a promissory note, see Illustration 8-10 of Weygandt, etc. textbook.
N/R: a written promissory note that the debtor (the maker of the note) promises to pay the creditor (the payee) the written amount on a specific date plus the agreeable interest.
Short-Term Investments & Receivables

18. B. Accounting for Notes Receivable (Continued)
Short-Term N/R: the note is due within one year or one operating cycle, whichever is longer. Short-term N/R is recorded at the amount expected to be collected.
Long-Term N/R: the due date of the note is beyond one year or one operating cycle, whichever is longer.
For interest bearing N/R, the accrued interest is recognized at the end of period.
Short-Term Investments & Receivables

19. Short-Term Investments & Receivables
Example (a):
a. Greenway Co. signed a promissory note to borrow $1,000 from Kay Bank on 9/30/08. The note is an interest bearing note with an annual interest rate of 12%. The maturity of the note is on 3/31/09 (i.e., a six-month note).
Kay Bank’s entries are as follows:
9/30/08 Note Receivable -- Greenway 1,000
Cash 1,000
Short-Term Investments & Receivables

20. Example (a): (Continued)
12/31/08 Interest Receivable 30
Interest Revenue 30
3/31/09 Cash 1,060
Note Receivable -- Greenway 1,000
Interest Receivable 30
Short-Term Investments & Receivables

21. Example (b):
b. On 4/16/08, Gateway Co. receives a $12, day promissory note at 12% annual interest from a customer (Four Seasons) from selling personal computers. Gateway’s entries to record the sale and collection are:
4/16/08 N/R -- Four Seasons 12,000
Sales Revenue 12,000
7/15/08 Cash 12,360
N/R 12,000
Interest Revenue 360
Interest = $12,000x12% x 90/360 = $360

22. Short-Term Investments & Receivables
Dishonored Note
If Four Season (the maker) failed to pay Gateway (the payee) on 7/15/08, Gateway will make the following entry: Accounts Receivable 12,360 Note Receivable 12,000 Interest Revenue 360
Short-Term Investments & Receivables

23. Short-Term Investments & Receivables
Example (c):
c. On 5/2/08, Grouti Co. sees that it will not be able to pay off its $5,000 account payable to GE Co. Grouti negotiated with GE. GE accepts a one-year $5,000 promissory note, with 10% interest from Grouti on 5/17/08 to settle Grouti’s $5,000 account receivable. GE’s entry is:
Note Receivable -- Grouti Co ,000
Accounts Receivable -- Grouti Co. 5,000
Short-Term Investments & Receivables

24. Using Receivables to Finance Operations
4/22/2017
Using Receivables to Finance Operations
1. Discounting Notes Receivables (with contingent liabilities).
2. Factoring Accounts Receivables
Short-Term Investments & Receivables

25. Internal Control Issue of Receivables
Separation of bookkeeping of receivable accounts from receiving of cash payments
Short-Term Investments & Receivables

26. Using Accounting for Decision Making
Current ratio = Current Assets
Current Liabilities
Short-Term Net Current
Acid-Test (Quick) ratio = Cash + Investment + Receivables
Current Liabilities
In general, a quick ratio of 1 is considered to be safe.
Short-Term Investments & Receivables

27. Average Collection Period
Accounts receivable turnover rate = Net credit sales (annual) /average net A/R Average collection period = 365 days / Accounts rece. turnover rate
Short-Term Investments & Receivables

28. Average Collection Period (contd.)
Example: Net Credit Sales (annual)= $912,500 Average A/R = $60,000 Accounts receivable turnover rate =$912,000/$60,000 = 15.2 (times) Average Collection Period of A/R =365 days/15.2 = 24 days
Short-Term Investments & Receivables