Accounting for Receivables
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Receivables are Assets (Increase side is a
debit) that are expected to be converted to
cash in the future
Classes of Receivables
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Trade Accounts Receivable
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Notes Receivable
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Primary sources are customers
Primary sources are loans to customers and
conversion of Accounts Receivable
Accrued Receivables: Adjusted at end of period
Trade Accounts Receivable
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Debit Accounts Receivable and credit
Sales (Or Service Revenue) when revenue
is earned
Debit Cash and credit Accounts
Receivable when cash is received
If a cash discount is earned by the
customer the cash received will be less
than the account receivable and the
difference is debited to Sales Discount
Sales on Account: Unique Problems
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Accounts that become uncollectible
Two methods used to account for these
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Specific write-off (simpliest)
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Simply write off the account when it becomes
uncollectible (This method is acceptable
whenever write-offs are nominal and consistent
over the years
Debit Bad Debts Expense XXX
Credit
Accounts Receivable XXX
Sales on Account: Unique Problems
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Allowance Method (More complicated)
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End of year ‘estimate’ of the amount of year end
receivables that will not be collectible in the
next year (There are several methods used to
estimate the uncollectible receivables)
Debit: Bad Debt Expense
Credit:
Allowance for Doubtful Accounts
When actual write-offs occur—
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Debit: Allowance for Doubtful Accounts
Credit:
Accounts Receivable
This method is used for large companies that
have larger amounts of bad debt write-offs
Notes Receivable
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Primary difference is all terms are
specified in writing and notes ordinarily
are for a longer period of time thereby
having an interest charge incorporated
Journal entries are:
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Note is made
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Debit Notes Receivable
XXX
Credit
Accounts Receivable (Cash) XXX
Note is collected
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Debit Cash
Credit
Notes Receivable
Credit
Interest Revenue
XXX
XXX
XX
Accrued Receivables
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Are the result of end of period adjustments
Example: Note is made on November 1,
2007 for 6 months in the amount of
$1,000. The note has a 12% interest rate
Financial Statements prepared on
December 31 would need to reflect the
following adjustment
Debit Interest Receivable
20
Credit
Interest Revenue
20
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($1,000 * .12 * 2/12)