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Chapter 8
REPORTING AND
ANALYZING
RECEIVABLES
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Chapter 8
Reporting and Analyzing
Receivables
After studying Chapter 8, you
should be able to:





Identify the different types of receivables.
Explain how accounts receivable are recognized in
the accounts.
Describe the methods used to account for bad
debts.
Compute the interest on notes receivable.
Describe the entries to record the disposition of
notes receivable.
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TYPES OF RECEIVABLES
Amounts due from individuals and other
companies-expected to be collected in cash
Three major classes of receivables



Accounts Receivable - amounts owed by customers
on account, expected to be collected within 30-60
days
Notes Receivable - claims for which formal
instruments of credit are issued
Other Receivables - non-trade receivables, for
example, interest receivable and advances to
employees
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Accounts Receivable...





Amounts owed by customers on account.
Result from the sale of goods/services.
Expected to be collected within 30-60 days.
Most significant type of claim held by
company.
Often called trade receivables.
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RECOGNIZING ACCOUNTS
RECEIVABLE
General Journal
Date
July 1
Account Titles
Accounts Receivable – Polo Company
Sales
Debit
Credit
1,000
1,000
When a business sells merchandise to a customer on
credit, Accounts Receivable is debited (increased) and
Sales is credited (increased).
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RECOGNIZING ACCOUNTS
RECEIVABLE
General Journal
Date
July 5
Account Titles
Sales Returns and Allowances
Accounts Receivable – Polo Company
Debit
100
Credit
100
When a business receives returned merchandise previously
When
merchandise
to a customer
on credit,
sold
to aabusiness
customersells
on credit,
Sales Returns
and Allowances
Receivable
is debited
and Sales
is credited.
isAccounts
debited and
Accounts
Receivable
is credited
(decreased).
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ACCOUNTING FOR BAD
DEBTS
Receivables are valued at the net amount expected
to be received in cash

Excludes amounts that the company estimates it will
not be able to collect (net realizable value)
Credit losses


Recorded as Bad Debts Expense
Considered a normal and necessary risk of doing
business
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2 Methods for Accounting for
Uncollectible Accounts
The Direct Write-off
Method
 The Allowance Method

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Direct Write-Off Method



Bad debt losses are not estimated.
No allowance account is used.
Accounts are written off when determined
uncollectible as follows:
Bad Debts Expense
200
Accounts Receivable--M. E. Doran
200
Not acceptable for financial reporting
purposes.
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THE ALLOWANCE METHOD

Allowance method
Required when bad debts are deemed to be
material in amount
 Uncollectible accounts are estimated
At the end of each period
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THE ALLOWANCE METHOD
General Journal
Date
Account Titles
Dec. 31
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
Credit
12,000
12,000
Estimated uncollectibles are debited to
Bad Debts Expense and credited to
Allowance for Doubtful Accounts at the
end of each period.
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Presentation of Allowance for
Doubtful Accounts
THE ALLOWANCE METHOD
General Journal
Date
Mar. 1
Account Titles
Allowance for Doubtful Accounts
Accounts Receivable - R. A. Ware
Debit
500
Credit
500
Actual uncollectibles are debited to Allowance for
Doubtful Accounts and credited to Accounts Receivable at
the time the specific account is written off.
General Ledger Balances after Write-off
Recovery of Uncollectible Accounts
General Journal
Date
July 1
Account Titles
Debit
Accounts Receivable – R. A. Ware
Allowance for Doubtful Accounts
500
Credit
500
When there is recovery of an account that has been written
off: reverse the entry made to write off the account and...
General Journal
Date
Account Titles
July 1
Cash
Accounts Receivable
Record the collection in the usual manner.
Debit
Credit
500
500
Percentage of Receivables...
Management establishes a percentage
relationship between the amount of
receivables and the expected losses
from uncollectible accounts.
2% of $600,000(credit sales) = $12,000
Aging of Accounts Receivable
The analysis of customer balances by the
length of time they have been unpaid.
The longer a debt is
outstanding
the less likely it
is to
be paid.
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AGING SCHEDULE
The older the accounts, the less likely to be paid
PERCENTAGE OF
RECEIVABLES BASIS
If the trial balance shows Allowance for Doubtful
Accounts with a credit balance of $528, an adjusting entry
for $1,700 ($2,228 - $528) is necessary.
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PERCENTAGE OF
RECEIVABLES BASIS
General Journal
Date
Dec. 1
Account Titles
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
Credit
1,700
1,700
If the trial balance shows Allowance for Doubtful
Accounts with a credit balance of $528, an adjusting entry
for $1,700 ($2,228 - $528) is necessary.
Notes Receivable...
Credit which is extended by use of a formal
instrument.
Notes Receivable...




Credit instrument normally requires:
payment of interest
extends for time periods of 60-90 days or longer.
Give the holder a stronger legal claim than the
other receivables.
Can be sold to another party.
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Notes Receivable...


Are often accepted from customers who
need to extend payment of an account
receivable.
Are often required
from high-risk customers.
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FORMULA FOR COMPUTING INTEREST
The basic formula for computing interest on an
interest-bearing note is:
Face Value
of Note
X
Annual
Interest
Rate
X
Time
in Terms of
One Year
=
Interest
The interest rate specified on the note is an
annual rate of interest.
COMPUTATION OF INTEREST
Illustration 8-11
Review
a.
b.
c.
d.
On 1/1/07, Oscar Co. gave a $10,000,
four month, 9% note payable to Dina
Inc. At the maturity date, how much will
Dina Inc. collect from Oscar Co.?
$10,000.
$10,900. $10,000 x .09 x 120/360
$10,225.
$10,300.
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HONOR OF NOTES
RECEIVABLE
Nov 1 Cash
Notes Receivable
Interest Revenue
(To record collection of Higley
Inc. note)
10,375
10,000
375
 A note is honored when it is paid in full at its maturity
date.
HONOR OF NOTES
RECEIVABLE
Sept 30. Interest Receivable
Interest Revenue
(To accrue 4 months’ interest)
300
If Wolder Co. prepares prepares financial
statements as of September 30, interest for 4
months, or $300, would be accrued.
300
ACCELERATING CASH
RECEIPTS
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

Companies frequently sell their
receivables to another company
to shorten their cash-to-cash
cycle
Reasons for selling receivables
•
•
•
Size of receivables, large amounts of cash are tied
up
Receivables may be the only reasonable source of
cash
Billing and collecting are time consuming and
costly
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SALE OF RECEIVABLES TO A
FACTOR
General Journal
Date
Account Titles
Cash
Service Charge Expense (2% x $600,000)
Accounts Receivable
Debit
Credit
588,000
12,000
600,000
Hendrendon Furniture factors $600,000 of
receivables to Federal Factors, Inc. Federal
Factors assesses a service charge of 2% of
the amount of receivables sold.
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