and Accounts Receivable Methods

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Financial Accounting
John J. Wild
Seventh Edition
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 7
Reporting and Analyzing
Receivables
C1
Accounts Receivable


Amounts due from
customers for credit sales.
Credit sales require:
 Maintaining a separate
account receivable for
each customer.
 Accounting for bad
debts that result from
credit sales.
7-3
C1
Credit Card Sales
With some credit cards and nearly all debit
cards, the seller deposits the credit card
sales receipts in the bank just like it
deposits a customer’s check.
The bank increases the balance in the
company’s checking account.
The company usually pays a fee of 1%
to 5% of card sales, for the service.
7-4
P1/P2
Valuing Accounts Receivable
Some customers may not pay
their account. Uncollectible
amounts are referred to as bad
debts. There are two methods
of accounting for bad debts:
 Direct Write-Off Method
 Allowance Method
7-5
P1
Matching vs. Materiality
The matching
(expense recognition)
principle requires
expenses to be reported
in the same accounting
period as the sales they
help produce.
The materiality
constraint states
that an amount can
be ignored if its
effect on the
financial statements
is unimportant to
users’ business
decisions.
7-6
P2
Allowance Method
At the end of each period, estimate total bad debts
expected to be realized from that period’s sales.
There are two advantages to the allowance method:
1. It records estimated bad debts expense in the
period when the related sales are recorded.
2. It reports accounts receivable on the balance
sheet at the estimated amount of cash to be
collected.
7-7
P2
Estimating Bad Debts Expense
Two Methods
1. Percent of Sales Method (Income
Statement Method); and
2. Accounts Receivable Methods
(Balance Sheet Methods)
 Percent of Accounts
Receivable Method
 Aging of Accounts
Receivable Method.
7-8
P2
Summary of Allowance Methods:
Estimate based
on % of Sales
Emphasis on
Matching
Sales
Bad
Debts
Exp.
Income
Statement
Focus
Estimate based on
% of Receivables
Estimate based on
an Aging of
Receivables
Emphasis on
Realizable Value
Emphasis on
Realizable Value
Accts.
Rec.
Accts.
Rec.
All. for
Doubtful
Accts.
Balance
Sheet Focus
All. for
Doubtful
Accts.
Balance
Sheet Focus
7-9
C2
Notes Receivable
Date of note
$1,000.00
Term
July 10, 2013
Payee
Ninety days
Principal
after
date I promise to pay to
the order of Barton Company, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars
Payable at
First National Bank of Los Angeles, CA
Interest Rate
Value received with interest at
No.
42
12%
Due Oct. 8, 2013
per annum
Maker
Julia Browne
Due Date
7-10
End of Chapter 7
7-11
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