Chapter F7
Power Notes
Receivables
Learning Objectives
1. Classification of Receivables
2. Internal Control of Receivables
3. Uncollectible Receivables
4. Uncollectibles – Allowance Method
5. Uncollectibles – Direct Write-Off Method
6. Characteristics of Notes Receivable
7. Accounting for Notes Receivable
8. Balance Sheet Presentation
9. Financial Analysis and Interpretation
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Chapter F7
Power Notes
Receivables
Slide # Power Note Topics
2
4
6
15
20
21
22
• Receivables – Classification and Control
• Uncollectibles – Direct Write-Off Method
• Uncollectibles –Allowance Method
• Accounting for Notes Receivable
• Balance Sheet Presentation
• Accounts Receivable Turnover
• Number of Days’ Sales in Receivables
Note: To select a topic, type the slide # and press Enter.
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Classification of Receivables

Accounts Receivable – used for selling
merchandise or services on credit, and normally
expected to be collected in a relatively short
period.

Notes Receivable – used to grant credit on the
basis of a formal instrument of credit, called a
promissory note.

Other Receivables – interest receivable, taxes
receivable, and receivables from officers or
employees.
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Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
• This method is not consistent with the
matching principle.
• Accounts that prove to be uncollectible are
written off in the year they become worthless.
• Uncollectible Accounts Expense is debited and
Accounts Receivable is credited for each such
transaction.
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Calculating Interest and Maturity Value
We received a $2,500, 10%, 90-day note dated March 16, 2000.
Interest Calculation
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Maturity Value Calculation
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
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Journal Entries – Direct Write-Off Method
Date
Description
Debit Credit
420
May. 10 Uncollectible Accts. Expense
Accts. Receivable - D. L. Ross
420
Write off uncollectible account of $420
Nov. 21 Accts. Receivable - D. L. Ross
Uncollectible Accts. Expense
420
Cash
420
Accts. Receivable - D. L. Ross
420
420
Reinstate and collect prior account written off.
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Accounting for Uncollectible Accounts Receivable
The Allowance Method
• This method is consistent with the matching
principle.
• Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
• Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
• Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
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Journal Entries – Allowance Method
Date
Description
Debit Credit
4,000
Dec. 31 Uncollectible Accts. Expense
Allowance for Doubtful Acct.
4,000
Estimated a total of $4,000 will be uncollectible.
Jan. 21 Allowance for Doubtful Accts.
Accts. Receivable - J. Parker
610
610
Write off uncollectible account of $610.
Jun. 10 Accts. Receivable - J. Parker
Allowance for Doubtful Accts.
Cash
Accts. Receivable - J. Parker
610
610
610
610
Reinstate and collect prior account written off.
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Estimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it
is estimated that 1% will be uncollectible, the
Uncollectible Accounts Expense is $3,000.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables
will be uncollectible and the Allowance for
Uncollectible Accounts is $510, the Uncollectible
Accounts Expense is $2,880 ($3,390 – $510).
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Accounts Receivable Aging and Uncollectibles
Days Past Due
Customer
365
Ashby & Co.
B. T. Barr
Brock Co.
J. Zimmer Co.
Total
Balance
$ 150
610
470
Not
Past Due
1-30
31-60
61-90
over
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
160
$75,000 $4,000 $3,100 $1,900 $1,200
$800
$300
Total accounts receivable shown by age.
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Accounts Receivable Aging and Uncollectibles
Days Past Due
Customer
365
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
J. Zimmer Co.
Total
Not
Past Due
1-30
31-60
61-90
over
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
160
$75,000 $4,000 $3,100 $1,900 $1,200
$800
$300
50%
80%
Uncollectibles
PERCENT
2%
5%
10%
20%
30%
Uncollectible percentages based on
experience and industry averages.
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Accounts Receivable Aging and Uncollectibles
Days Past Due
Customer
365
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
J. Zimmer Co.
Total
Not
Past Due
1-30
31-60
61-90
over
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
160
$75,000 $4,000 $3,100 $1,900 $1,200
$800
$300
50%
80%
Uncollectibles
PERCENT
AMOUNT
2%
$3,390 = $1,500
5%
10%
$200
$310
20%
$380
30%
$360
$400
$240
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510
A
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390
Net accounts receivable 82,910
A Balances before adjustment
Uncollectible Accts. Expense
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510 A
2,880 B
Uncollectible Accts. Expense
B
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390
Net accounts receivable 82,910
A Balances before adjustment
B Year-end adjustment
$3,390 - $510 = $2,880
2,880
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510 A
2,880 B
3,390
C
Uncollectible Accts. Expense
B
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390 C
Net accounts receivable 82,910
A Balances before adjustment
B Year-end adjustment
$3,390 - $510 = $2,880
2,880
C Balance after adjustment
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Characteristics of Notes Receivable
A promissory note is a written document
containing a promise to pay:

a specific amount of money (principal)

to a specific person or company (payee)

at a specific place

on a specific date or upon demand

plus interest at a specific percentage of
the principal (face) amount per year
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Accounting for Notes Receivable
Date
Description
Debit Credit
6,000
Nov. 21 Notes Receivable
Accts. Receivable - Bunn Co.
6,000
Received a $6,000,30-day, 12% note.
Dec. 21 Cash
Notes Receivable
Interest Revenue
6,060
6,000
60
Collected amount due on note dated November 21.
Principal + Interest = Maturity Value
$6,000 +
($6,000 x 12% x 30 / 360) = $6,060
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Understanding the 360-Day Year

In commercial transactions it is traditional
to use a 360-day year.

The historic rationale for this procedure
was ease of calculation which made sense
before the computer and calculator age.

Why does this practice continue when
most small calculators and desktop
computers can present complex interest
calculations in a few seconds?
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Another Look at the 360-Day Year
1. Assume a $100,000 note dated June 1 for 90 days
at an interest rate of 12 percent. The textbook
calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00
2. A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90
3. When large sums are involved the 360-day method
(known as ordinary interest or banker’s rule) yields
significantly more interest to the lender. It is used
by banks and commercial organizations.
4. The second method (known as exact interest) is
used by the federal government and the Federal
Reserve System.
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Crabtree Co.
Balance Sheet
December 31, 20-Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for
doubtful accounts
Interest receivable
$119,500
250,000
$445,000
15,000
430,000
14,500
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Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Accts. receivable turnover
2000
1999
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
12.7 times 9.2 times
Use: To assess the efficiency in collecting
receivables and in the management of credit.
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Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Average collection period
2000
1999
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
28 days
36 days
Use: To assess the efficiency in collecting
receivables and in the management of credit.
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Chapter F7
Power Notes
Receivables
This is the last slide in Chapter F7.
Note: To see the topic slide, type 2 and press Enter.
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