Chapter 8
Receivables
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. List the common classifications of
After studying this
receivables.
chapter,
you should
2. Summarize
and provide
examples of
internal controlbeprocedures
able to: that apply to
receivables.
3. Describe the nature of and the
accounting for uncollectible receivables.
4. Journalize the entries for the allowance
method of accounting for uncollectibles,
and estimate uncollectible receivables
based on sales and on an analysis of
receivables.
Objectives
5. Journalize the entries for the direct write-off
of uncollectible receivables.
6. Describe the nature and characteristics of
promissory notes.
7. Journalize the entries for notes receivable
transactions.
8. Prepare the Current Assets presentation of
receivables on the balance sheet.
9. Compute and interpret the accounts
receivable turnover and the number of days’
sales in receivables.
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—include interest
receivable, taxes receivable, and receivables
from officers and employees.
Separating the Receivable Functions
Credit
Approval
Credit
Info.
Collections
Goods
or
services
Sales
Acctg.
Info.
Invoice
Accounting
Acctg.
Info
Uncollectible Receivables
Companies often sell
their receivables to other
companies. This
transaction is called
factoring the
receivables, and the
buyer of the receivables
is called a factor.
Uncollectible Receivables
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.
The Allowance Method
On December 31, Cynthia Richards estimates
that a total of $4,000 of the $105,000 balance in
her company’s Accounts Receivable will
eventually be uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
4 000 00
4 000 00
The Allowance Method
The net amount that is
expected to be collected,
$101,000 ($105,000 –
$4,000), is called the net
realizable value (NRV).
The adjusting entry
reduces receivables to
the NRV and matches
uncollectible expenses
with revenues.
The Allowance Method
The
adjusting
entry fills
the bucket.
Allowance
for
Doubtful
Accounts
The Allowance Method
Writing off
accounts
empties the
bucket.
The Allowance Method
Jan. 21 Allowance for Doubtful Accounts
Accounts Receivable—John Parker
To write off the uncollectible
account.
On January 21, John
Parker’s account totaling
$610 is considered to be
uncollectible.
610 00
610 00
The Allowance Method
Jun. 10 Accounts Receivable—John Parker
Allowance for Doubtful Accounts
To reinstate the account
written off on Jan. 21.
An
to reinstate
Onentry
June is
10,made
the written-off
John
Parker’s
account.
account
is collected.
610 00
610 00
The Allowance Method
Jun. 10 Cash
610 00
Accounts Receivable—John Parker
To record collection on
account.
A second entry is made to
record receipt of the cash.
610 00
The Allowance Method
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.
The Allowance Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
3 000 00
Allowance for Doubtful Accounts
Based on a Percentage of Sales
3 000 00
The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
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 currently has a balance of
$510, the Uncollectible Accounts Expense must be
debited for $2,880 ($3,390 – $510).
The Allowance Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
2 880 00
2 880 00
Based on an Analysis of Receivables
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
Saxon Woods
160
Total
$86,300
Not
Past
Due
Days Past Due
1-30
31-60
61-90 91-180 181-365
over
365
$ 150
$ 350
$260
$ 470
160
$75,000 $4,000
$3,100 $1,900 $1,200
Total accounts receivable
shown by age.
$800
$300
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
Saxon Woods
160
Total
$86,300
Not
Past
Due
Days Past Due
1-30
31-60
61-90 91-180 181-365
over
365
$ 150
$ 350
$260
$ 470
160
$75,000 $4,000
$3,100 $1,900 $1,200
$800
$300
10%
50%
80%
Uncollectibles
PERCENT
2%
5%
20%
30%
Uncollectible percentages based on
experience and industry averages.
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
Saxon Woods
160
Total
$86,300
Not
Past
Due
Days Past Due
1-30
31-60
61-90 91-180 181-365
over
365
$ 150
$ 350
$260
$ 470
160
$75,000 $4,000
$3,100 $1,900 $1,200
$800
$300
5%
10%
50%
80%
$200
$310
Uncollectibles
PERCENT
2%
AMOUNT $3,390 = $1,500
20%
$380
30%
$360
$400
$240
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
2,880
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
Net realizable value
$82,910
3,390
A Balances before adjustment
B Year-end adjustment:
$3,390 – $510 = $2,880
C
Balance after adjustment
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.
The Direct Write-Off Method
May 10 Uncollectible Accounts Expense
420 00
Accounts Receivable—D. L. Ross
To write off an uncollectible
account.
On May 10, D. L. Ross’ account was
determined to be uncollectible. The
$420 balance is written off the books.
420 00
The Direct Write-Off Method
Nov. 1 Accounts Receivable—D. L. Ross
420 00
Uncollectible Accounts Expense
To reinstate account written
off on May 10.
1st Entry
In November, D. L. Ross remits a check
for $420 in payment of his account.
420 00
The Direct Write-Off Method
Nov. 1 Cash
420 00
Accounts Receivable—D. L. Ross
To record collection on
account.
2nd Entry
A second entry is needed to record
receipt of the cash.
420 00
Notes Receivable
2,500.00
$_____________
Payee
Fresno, California______________20___
March 16
06
Ninety days
________________
_AFTER DATE _______
We PROMISE TO PAY TO
THE ORDER OF ____________________________________________
Judson Company
Two
thousand five hundred 00/100--------------------------_________________________________________________DOLLARS
City National Bank
PAYABLE AT ______________________________________________
Maker
VALUE RECEIVED WITH INTEREST AT ____
10%
NO. _______
DUE___________________
14
June 14, 2006
H. B. Lane
TREASURER, WILLIARD COMPANY
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
Notes Receivable
Let’s
determine
due
The date
a note isthe
to be
paid is
called
date.note
It is also
date
forthea due
90-day
referred
as the maturity
date.
datedtoMarch
16.
Notes Receivable
Total days in note
Number of days in March
Issue date of note
Remaining days in March
Number of days in April
Number of days in May
Residual days in June
90 days
31
March 16
–15 days
75 days
–30 days
45 days
–31 days
14 days
Answer: June 14
Notes Receivable
The amount that is due at the
maturity or due date is called
the maturity value.
Notes Receivable
Received a $6,000, 12%, 30-day note
dated November 21, 2006 in settlement
of the account of W. A Bunn Co.
Notes Receivable
Interest Calculation
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00
Maturity Value Calculation
Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00
Accounting for Notes Receivable
Nov. 21 Notes Receivable
Sales
6 000 00
6 000 00
Received 30-day, 12% note
dated November 21, 2006.
A $6,000 30-day, 12% note dated
November 21 is received from W. A Bunn
Company in exchange for merchandise.
Accounting for Notes Receivable
Dec. 21 Cash
6 060 00
Notes Receivable
6 000 00
Interest Revenue
Received principal and interest
on matured note.
On December 21, when the note matures,
the firm receives $6060 from W. A. Bunn
Company ($6,000 plus $60 interest).
60 00
Accounting for Notes Receivable
Dec. 21 Accounts Receivable—Bunn Co.
Notes Receivable
Interest Revenue
To record dishonored note and
6 060 00
6 000 00
60 00
interest.
If W. A. Bunn Company fails to pay the note on
the due date, it is considered a dishonored note
receivable. The note and interest are transferred
to the customer’s account.
Accounting for Notes Receivable
Dec. 1 Notes Receivable
Accounts Receivable—Crawford
Company
Received note in settlement of
4 000 00
4 000 00
account.
A 90-day, 12% note dated December 1, 2006,
is received from Crawford Company to settle
its account, which has a balance of $4,000.
Accounting for Notes Receivable
Dec. 31 Interest Receivable
40 00
Interest Revenue
Adjusting entry for accrued
interest.
Assuming that the accounting period
ends on December 31, an adjusting entry
is required to record the accrued interest
of $40 ($4,000 x 0.12 x 30/360).
40 00
Accounting for Notes Receivable
Mar. 1 Cash
4 120 00
Notes Receivable
Interest Receivable
Interest Revenue
Received payment on note and
4 000 00
$4,000 x
0.12 x
60/360
interest.
On March 1, 2004, $4,120 is received for
the note ($4,000) and interest ($120).
40 00
80 00
Receivables
on the
Balance Sheet
Crabtree Co. Balance Sheet
December 31, 2006
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for
doubtful accounts
Interest receivable
Merchandise inventory
$119,500
250,000
$445,000
15,000 430,000
14,500
714,000
Highlighted items are receivables
Financial
Analysis and
Interpretation
Accounts Receivable Turnover
Net sales
Average accounts receivable
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
2006
2005
$36,000,000 $32,500,000
$ 1,080,000
1,220,000
$2,300,000
$1,150,000
$1,050,000
1,080,000
$2,130,000
$1,115,000
Accounts receivable turnover
31.3 times 29.1 times
Use: To assess the efficiency
in collecting receivables
and in the management
of credit.
$36,000,000 $32,500,000
$1,150,000 $1,115,000
Number of Days’ Sales in Receivables
Accounts receivable, end of year
Average daily sales
Accounts receivable,
$1,220,000end of year
=12.4 days
Average
daily sales
on account
($36,000,000
÷ 365
days)
Use: To assess the efficiency in collecting
receivables and in the management of credit.
Chapter 8
The End