CHAPTER
8
Reporting and Analysing
Receivables
Types of Receivables
• Amounts due from individuals and
companies that are expected to be
collected in cash
• Frequently classified as
– Accounts receivable
– Notes receivable
– Other receivables
Accounts Receivable
• Amounts owed by customers on account
• From sale of goods/services (trade)
• Normally expected to be collected within 30
days
• Most significant type of claim held by
company
Notes Receivable
• Claims for which formal instruments of credit are
issued as evidence of debt
• The credit instrument normally requires the
debtor to pay interest and extends for time
periods of 30 days or longer
• Notes receivable can be current or long-term
Other Receivables
• Nontrade including:
– Interest receivable
– Loans to company officers
– Advances to employees
– Refundable income taxes
– Recoverable sales taxes
Accounts Receivable
• Recorded when service is provided or at
point of sale of merchandise on account
Accounts Receivable
Sales
100
100
Allowance Method
• The matching principle dictates that the bad
debt expense must be recorded in the period
when the related revenue is earned
• There are many acceptable methods to
estimate uncollectible accounts
The Percentage of Receivables
Method
• Management establishes a percentage
relationship between amount of receivables
and expected losses from uncollectible
accounts
– Apply percentage to total receivables
– Apply percentage to receivables classified
according to the length of time they have
been outstanding (known as aging the
accounts receivable)
Recording Estimated Uncollectibles
Abrams Furniture has credit sales of $1,200,000, of
which $200,000 remains uncollected. The credit manager
estimates $11,000 will prove uncollectible. The adjusting
entry must take into consideration any opening balance
in the allowance account to pick up amounts from prior
years that are still outstanding.
Bad Debts Expense
Allowance for Doubtful Accounts
xxxx
xxxx
Recording Estimated Uncollectibles
Bad Debts Expense
10,000
Allowance for Doubtful Accounts
The percentage of
receivables method
gives you the
BALANCE in the
Allowance account,
not the amount of the
adjustment.
10,000
Allowance for
Doubtful Accounts
Jan. 1 Bal.
Adj. entry
1,000
10,000
Dec. 31 Bal. 11,000
HAMPTON FURNITURE
Balance Sheet (partial)
Current Assets
Cash
$ 14,800
Accounts receivable
$200,000
Less: Allowance for doubtful accounts
11,000
Net realizable value
189,000
Net Realizable Value
• Net amount expected to be collected in cash
• Excludes amounts the company estimates it
will not collect
• Keeps receivables from being overstated on
the balance sheet
Write-Off of an
Uncollectible Account
The vice president of finance authorizes a
write-off of $2,500 owed by T. O. Ebbet:
Bad Debts Expense
10,000
Allowance for Doubtful Accounts
Accounts Receivable
Jan .1 Bal 227,500
Mar. 1 Bal 225,000
Mar. 1 2,500
10,000
Allowance for
Doubtful Accounts
Mar. 1 2,500
Jan .1 Bal 11,000
Mar. 1 Bal 8,500
Recovery of an Uncollectible Account
Accounts Receivable—Ebbet
Allowance for Doubtful Accounts
2,500
Cash
Accounts Receivable
2,500
2,500
Record in two separate entries
2,500
Notes Receivable
• Result from sale of goods and services
(trade)
• Stronger legal claim to assets than accounts
receivable; written promise (promissory note)
to repay
• Negotiable instruments and may be
transferred to another party by endorsement
Notes Receivable
• Credit instrument normally requires
– Payment of interest
– Extends for time periods of 60-90 days or
longer
• Often accepted from customers who need to
extend payment of an account receivable
• Often required from high risk customers
Notes Receivable
• Interest is charged as: Principal x Rate x Time
• Interest is always quoted using annual rates
– For example, a six-month $10,000 note at 4%
means that the annual rate of interest is 4%
– Interest would be $10,000 x 4% x 6/12
• To record note receivable:
Dr. Note receivable (face value)
Cr. Cash, A/R, or Sales
Managing Receivables
•
•
•
•
•
Determine to whom to extend credit
Establish a payment period
Monitor collections
Evaluate receivables balance
Accelerate cash receipts from receivables when
necessary
Credit Risk
• Risk of nonpayment of account
concentrated by customer or
geographically
• Disclose concentration of credit risk
Evaluating the Receivables
Balance
• Liquidity is measured by how quickly certain
assets can be converted into cash
– Receivables turnover
– Average collection period
Receivables Turnover
• Is a measure of the liquidity
of receivables
Receivables Turnover =
Net Credit Sales
Average Gross
Receivables
Average Collection Period
• Is the average amount of time that
a receivable is outstanding
365
days
Average Collection Period =
Receivables Turnover
Credit and Debit Card Sales
• These sales have a cost to the business,
which must be recorded at the times of sale
• For example, the business may have to pay
the credit card company 2% for each sale
• A sale of $100 would be recorded as
follows:
Dr. A/R—Credit card (or Cash)
Dr. Service Charge Expense
Cr. Sales Revenue
98
2
100