9-1
CHAPTER 9
RECEIVABLES AND
PAYABLES
9-2
CHAPTER 9
RECEIVABLES AND
PAYABLES
CAUTION !
Most students find this chapter
to be the most challenging in the
first semester of introductory
accounting.
9-3
Accounts Receivable
Amounts owed to the
company.
Arise from credit sales to
customers.
Not all customers will pay
in full.
Subsidiary Ledger and
Control Accounts
Until now, we have assumed that each
accounts receivable account will be
shown in the general ledger.
However, because of certain efficiencies,
customers’ accounts are actually kept
in a subsidiary ledger in practice.
This practice necessitates the use of a
general ledger control account .
9-4
Subsidiary Ledger and
Control Accounts
A subsidiary ledger is a group of related
accounts which show the details of the
balance of a general ledger control
account.
A general ledger control account shows
the total balance of all the subsidiary
accounts related to it.
9-5
Subsidiary Ledger and
Control Accounts
General Ledger
Subsidiary Ledger
Accounts Receivable
Control Account
Bal. 5,500
Customer A
2,500
Customer B
1,000
Customer C
500
Customer D
1,500
9-6
9-7
Uncollectible Accounts
Until now, we have also assumed that all
accounts receivable will be collected.
However, because of various
circumstances, some customers will
not be able to keep their promises to
pay.
9-8
Uncollectible Accounts
As a result, businesses must record
the fact that some customers will not
ever pay their account.
Therefore, at the end of each year, an
adjusting entry is made to record an
estimate of the uncollectible
accounts (i.e., “bad debts”) related to
the period.
9-9
Uncollectible Accounts
Why use an estimate? Why not wait
until a specific customer fails to pay
and use an exact amount?
ANSWER: The Matching Principle.
1994
1995
Sales
XXX
Expenses
Net Income
-XX
X
1996
9-10
Uncollectible Accounts
When the adjusting entry is made, we
do not know who the customers are
who will not pay.
We only know that some of the
customers will likely not be able to pay.
That is why we have to use an estimate
for the entry.
9-11
Uncollectible Accounts
Methods to Account for
Uncollectible Accounts
Direct Write-Off
Method
Allowance
Method
9-12
Uncollectible Accounts
Methods to Account for
Uncollectible Accounts
Direct Write-Off
Method
GAAP
Allowance
Method
9-13
Allowance Method
Adheres to the
matching principle.
Record an estimate of
uncollectible accounts expense
in the period the revenue is
generated.
9-14
Allowance Method
Adjusting entry to record the estimate
of uncollectible accounts expense:
GENERAL JOURNAL
Date
Description
Page 34
Post.
Ref.
Debit
Credit
9-15
Allowance Method
Adjusting entry to record the estimate
of uncollectible accounts expense:
Classified as a selling
Classified as a contra-asset
expense on the income
account on the balance
statement.
sheet.
GENERAL JOURNAL
Page 34
Date
Description
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
Post.
Ref.
Debit
Credit
XXX
XXX
9-16
Allowance Method
Accounts receivable
Less: Allowance for uncollectible accounts
Net realizable value of accounts receivable
The net realizable value is the
amount of the accounts receivable
that the business expects to
collect (i.e., the true asset).
9-17
Allowance Method
How is the estimate for the adjusting
entry determined?
You will meet a
woman who will pay
off all your accounts...
9-18
Allowance Method
Two approaches for estimating
Uncollectible Accounts
 Percentage-of-Sales
 Percentage-of-Receivables
9-19
Percentage-of-Sales
Focus is on determining the amount to
record on the income statement as
uncollectible accounts expense.
Percentage is estimated based
on actual uncollectible accounts
from prior years’ credit sales.
9-20
Percentage-of-Sales
N e t S a le s
 % E s tim a te d U n c o lle c tib le
A m o u n t o f J o u r n a l E n tr y
9-21
Percentage-of-Sales
Question
During 1998, Tools Etc. had total sales of
$550,000, of which $75,000 were cash sales.
In the past, Tools Etc.’s bad debt
percentage has been 1% of credit sales. On
12/31, Tools Etc. will credit the Allowance
for Uncollectible Accounts
a. $ 750.
b. $4,750.
c. $5,500.
d. No entry is needed.
9-22
Percentage-of-Sales
Question
During 1998, Tools Etc. had total sales of
$550,000, of which $75,000 were cash sales.
In the past, Tools Etc.’s bad debt
percentage has been 1% of credit sales. On
12/31, Tools Etc. will credit the Allowance
for Uncollectible Accounts
$550,000 Total Sales
a. $ 750.
- 75,000 Cash Sales
b. $4,750.
475,000 Credit Sales
×
.01
c. $5,500.
$ 4,750
d. No entry is needed.
9-23
Percentage-of-Sales
Example
During 1998, Books, Inc. had total sales of
$1,000,000 of which $250,000 were cash sales.
In the past, Books Inc.’s bad debt percentage
has been ½ of 1% of credit sales.
Prepare the adjusting journal entry required for
Books, Inc. to record uncollectible accounts
expense for 1998.
9-24
Percentage-of-Sales
Example
GENERAL JOURNAL
Date
Description
Dec. 31 Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
Page 34
Post.
Ref.
Debit
Credit
3,750
3,750
To record uncollectible accounts
expense
$1,000,000 - $250,000 = $750,000 .005 = $3,750
9-25
Percentage-of-Receivables
Focus is on determining the desired
balance in the Allowance for
Uncollectible Accounts on the balance
sheet.
9-26
Percentage-of-Receivables
First, determine the historical bad debt
percentage based on accounts receivable.
Then, compute the estimated uncollectible
amount of accounts receivable by either:
(1) Total accounts receivable balance times a single
percentage
or
(2) An aging of accounts receivable times several
percentages
9-27
Percentage-of-Receivables
The amount calculated with this method
represents the desired balance for the
allowance for uncollectible accounts (i.e., the
account balance which must result from
making the adjusting entry.)
Since the allowance for uncollectible accounts is
a permanent account and normally has an
existing balance, that balance must be
considered in determining the amount of the
adjusting entry.
9-28
Percentage-of-Receivables
Therefore, to determine the amount for the
adjusting entry, first compute the amount
of the desired balance in the allowance
account.
Then, compare it with the existing balance in
the account.
Finally, make the adjusting entry necessary
to “force” the required balance.
9-29
Percentage-of-Receivables
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
- Allowance Account Credit Balance
Amount of Journal Entry
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
+ Allowance Account Debit Balance
Amount of Journal Entry
9-30
Percentage-of-Receivables
Let’s look at
an example
for
Books, Inc.
9-31
Percentage-of-Receivables
Example #1
At 12/31/98, Books, Inc.’s Accounts Receivable
balance was $80,000 and the balance before
adjustment in the Allowance for Uncollectible
Accounts was $500 (credit).
In the past, the uncollectible accounts
percentage has been 3% of accounts
receivable.
Prepare the adjusting journal entry required for
Books, Inc. to record uncollectible accounts
expense for 1998.
9-32
Percentage-of-Receivables
Example #1
Accounts Receivable
 % Estimated Uncollectible
Desired Balance in Allowance Account
- Allowance Account Credit Balance
Amount of Journal Entry
$80,000

3.00%
2,400
500
$ 1,900
9-33
Percentage-of-Receivables
Example #1
GENERAL JOURNAL
Date
Description
Dec. 31 Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
To record uncollectible accounts
expense
Page 34
Post.
Ref.
Debit
Credit
1,900
1,900
9-34
Percentage-of-Receivables
Example #1
GENERAL JOURNAL
Date
Page 34
Post.
Ref.
Description
Dec. 31 Uncollectible Accounts Expense
Debit
Credit
1,900
Allowance for Uncollectible Accounts
1,900
To record uncollectible accounts
expense
ACCOUNT NAME: Allowance for Uncollectible Accounts
Date
Description
12/31
Balance
12/31
Adjusting entry
PR
ACCOUNT No.
Debit
Credit
172
Balance
500
GJ34
1,900
2,400
9-35
Percentage-of-Receivables
Now, let’s
look at an
example
for
Geeks, Inc.
9-36
Percentage-of-Receivables
Example #2
At 12/31/98, Geeks, Inc.’s Accounts
Receivable balance was $80,000 and the
balance before adjustment in the Allowance
for Uncollectible Accounts was $500 (debit).
Historically, the bad debt percentage based
on accounts receivable has been 3%.
What would be the adjusting entry to record
uncollectible accounts expense for 1998?
9-37
Percentage-of-Receivables
Example #2
ALLOWANCE FOR
UNCOLLECTIBLE ACCTS
Bal. Before
Adjustment 500
9-38
Percentage-of-Receivables
Example #2
ALLOWANCE FOR
UNCOLLECTIBLE ACCTS
Bal. Before
Adjustment 500
80,000 x .03 = 2,400 (Desired bal.)
9-39
Percentage-of-Receivables
Example #2
ALLOWANCE FOR
UNCOLLECTIBLE ACCTS
Bal. Before
Adjustment 500
??
2,400
After Adjustment
80,000 x .03 = 2,400 (Desired bal.)
9-40
Percentage-of-Receivables
Example #2
ALLOWANCE FOR
UNCOLLECTIBLE ACCTS
Bal. Before
Adjustment 500
??
2,400
After Adjustment
80,000 x .03 = 2,400 (Desired bal.)
-500 + X = 2,400
X = 2,900
9-41
Percentage-of-Receivables
Example #2
ALLOWANCE FOR
UNCOLLECTIBLE ACCTS
Bal. Before
Adjustment 500
2,900
Adjusting Entry
2,400
After Adjustment
80,000 x .03 = 2,400 (Desired bal.)
-500 + X = 2,400
X = 2,900
9-42
Percentage-of-Receivables
Example #2
GENERAL JOURNAL
Page 1
Date
Description
12/31/98 Uncollectible Accounts Expense
Allowance for Uncollectible Accts.
To record 1998 estimate for
uncollectible accounts
PR
Debit
Credit
2,900
2,900
9-43
Percentage-of-Receivables
Now, let’s
look at a
third
example
9-44
Percentage-of-Receivables
Example #3
Tools Etc.
December 31, 1998 Aging
A/R
Estimated Bad Uncollectible
Days Past Due Balance
Debt %
Estimate
Current
$ 45,000
1%
1-30 Days
15,000
3%
31-60 Days
5,000
5%
Over 60 Days
2,000
10%
Desired Credit
Total A/R $ 67,000
Balance
Allowance for
Uncoll. Accts.
Amount for
Journal Entry
9-45
Percentage-of-Receivables
Example #3
Tools Etc.
December 31, 1998 Aging
A/R
Estimated Bad Uncollectible
Days Past Due Balance
Debt %
Estimate
Current
$ 45,000
1%
1-30 Days
15,000
3%
31-60December
Days
5%
The
315,000
Over 60 Days
2,000
10%
balance in the
Desired Credit
Allowance
Total A/Rfor$ 67,000
Balance
Allowance for
Uncollectible
Uncoll. Accts.
(350)
Accounts was $350
Amount for
(credit).
Journal Entry
9-46
Percentage-of-Receivables
Example #3
Tools Etc.
What will be the balance
in the Allowance for
Decemberafter
31, 1998
AgingEtc. makes the
Uncollectible Accounts
Tools
A/R
Estimated Bad Uncollectible
year-end
adjusting
entry?
Days Past Due Balance
Debt %
Estimate
Current
1-30 Days
31-60 Days
Over 60 Days
Total A/R
$ 45,000
15,000
5,000
2,000
1%
3%
5%
10%
Desired Credit
$ 67,000
Balance
Allowance for
Uncoll. Accts.
Amount for
Journal Entry
(350)
9-47
Percentage-of-Receivables
Example #3
Tools Etc.
What will be the balance
in the Allowance for
Decemberafter
31, 1998
AgingEtc. makes the
Uncollectible Accounts
Tools
A/R
Estimated Bad Uncollectible
year-end
adjusting
entry?
Days Past Due Balance
Debt %
Estimate
Current
1-30 Days
31-60 Days
Over 60 Days
Total A/R
$ 45,000
15,000
5,000
2,000
1% $
3%
5%
10%
Desired Credit
$ 67,000
Balance
Allowance for
Uncoll. Accts.
Amount for
Journal Entry $
450
450
250
200
1,350
(350)
1,000
9-48
Percentage-of-Receivables
Example #2
GENERAL JOURNAL
Page 1
Date
Description
12/31/98 Uncollectible Accounts Expense
Allowance for Uncollectible Accts.
To record 1998 estimate for
uncollectible accounts
PR
Debit
Credit
1,000
1,000
9-49
Write-Off of Receivables
When it will become apparent that a
specific account receivable will not be
collected, it must be “written off”.
9-50
Write-Off of Receivables
The entry to write-off the uncollectible
account receivable.
GENERAL JOURNAL
Date
Description
Allowance for Uncollectible Accounts
Accounts Receivable
Page 64
Post.
Ref.
Debit
Credit
XXX
XXX
9-51
Write-Off of Receivables
Example
Prepare the journal entry to record the
following transaction.
On March, 28, 1998, Books, Inc. determines
that Ready-To-Read’s accounts receivable
for $500 is uncollectible.
9-52
Write-Off of Receivables
Example
GENERAL JOURNAL
Date
Description
Mar. 28 Allowance for Uncollectible Accounts
Accounts Receivable
To record uncollectible account
Page 34
Post.
Ref.
Debit
Credit
500
500
9-53
Write-Off of Receivables
Example
Now, assume that before the previous
entry, the Accounts Receivable balance
was $67,000 and the Allowance for
Uncollectible Accounts balance was
$1,350.
Let’s see what effect the write-off had on
these accounts.
9-54
Write-Off of Receivables
Example
Before
After
Write-Off Write-Off
Accounts receivable
$ 67,000
$ 66,500
Less: Allow. for uncollectible accts. 1,350
850
Net realizable value
$ 65,650
$ 65,650
Notice that the $500 write-off did not change
the net realizable value (which means that it
did not change total assets) nor did it affect
any income statement accounts!!!!!
.
9-55
Uncollectible Accounts
Recovered
When a customer makes a payment
after an account has been written off,
two journal entries are required:
 Reverse the write-off.
GENERAL JOURNAL
Date
1
Description
Page 69
Post.
Ref.
Accounts Receivable
Allowance for Uncollectible Accounts
Debit
Credit
XXX
XXX
9-56
Uncollectible Accounts
Recovered
When a customer makes a payment
after an account has been written off,
two journal entries are required:
 Record the cash collection.
GENERAL JOURNAL
Date
1
2
Description
Page 69
Post.
Ref.
Accounts Receivable
Debit
XXX
Allowance for Uncollectible Accounts
Cash
Credit
Why?
Accounts Receivable
XXX
XXX
XXX
9-57
Credit Card Sales
Companies accept credit
cards for several reasons:
 To
increase sales.
 To avoid providing credit
directly to customers.
 To avoid losses due to bad
checks.
 To receive payment quicker.
9-58
Credit Card Sales
When credit card sales are made, the
company must pay the credit card
company a fee for the service it
provides.
9-59
Credit Card Sales
On July 6, Kid’s Clothes’ credit card
sales were $1,500. The credit card
company charges a 2% service fee.
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
Page 34
Post.
Ref.
Debit
Credit
9-60
Credit Card Sales
On July 6, Kid’s Clothes’ credit card
sales were $1,500. The credit card
company charges a 2% service fee.
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
July 6 Cash
Credit Card Expense
Sales
$1,500 × 2% = $30 Credit Card Fee
Page 34
Post.
Ref.
Debit
Credit
1,470
30
1,500
9-61
Current Liabilities
Obligations payable within one year.
Normally are paid using current assets.

Clearly determinable liabilities


e.g. Payroll taxes withheld, etc.
Estimated liabilities

e.g. Product Warranty
9-62
Contingent Liabilities

Existence of liability and amount depends
on (i.e., is contingent on) the outcome of
some future event


Must record in accounts if liability is
probable and reasonably estimable


Examples include: lawsuits, income tax
disputes, co-signer of note payable
However, this is normally not the case
If the contingent liability is not probable
and reasonably estimable, how is it
disclosed? Notes to the financial statements
9-63
Promissory Notes

An unconditional written promise...

Made & signed by the maker (borrower)...

To pay the payee…

A definite amount of money…

Plus interest (usually)…

On the maturity date…

Or on demand.
9-64
Promissory Notes
Wheaton, Illinois
$1200
Sixty days
the order of
January 5, 1999
after date I promise to pay to
Yankee Brothers, Inc.
One thousand two hundred --------------------------------- Dollars
Payable at
Wheaton Mountain Bank
Value received with interest at
No.
42
Due
March 6, 1999
12%
per annum
Dennis Taylor
The Kitchen Taylor
9-65
Promissory Notes
Term
$1200
Sixty days
thePrincipal
order of
Wheaton, IllinoisPayee January 5, 1999
after date I promise to pay to
Yankee Brothers, Inc.
One thousand two hundred --------------------------------- Dollars
Payable at
Wheaton
Interest Rate
Mountain Bank
Value received with interest at
No.
42
Due
12%
March 6, 1999
Maker
per annum
Dennis Taylor
The Kitchen Taylor
Due Date
9-66
Promissory Notes
“Interesting” Calculation
I = P× R × T
Interest
Principal
Rate
Time
9-67
Promissory Notes
Example
On March 1, 1998, Beautiful Cosmetics purchased
a copier for 10,000 from Business Machines, Inc.
Beautiful Cosmetics gave Business Machines, Inc.
$1,000 cash plus a 12% note due in 90 days.
(Assume Business Machines, Inc. uses a periodic
inventory system.)
Prepare the journal entries for Beautiful
Cosmetics and Business Machines, Inc.
9-68
Promissory Notes
Example
Business Machines, Inc.
GENERAL JOURNAL
Date
Mar.
Description
1 Notes Receivable
Cash
Sales
To record copier sale
Page 56
Post.
Ref.
Debit
Credit
9,000
1,000
10,000
9-69
Promissory Notes
Example
Beautiful Cosmetics
GENERAL JOURNAL
Date
Mar.
Description
1 Office Equipment
Page 34
Post.
Ref.
Debit
Credit
10,000
Notes Payable
9,000
9,000
Cash
1,000
1,000
To record copier purchase
9-70
Promissory Notes
Example
What is the maturity date of the note
between Beautiful Cosmetics and Business
Machines, Inc.?
9-71
Promissory Notes
Example
What is the maturity date of the note
between Beautiful Cosmetics and Business
Machines, Inc.?
Days in March
- Note Date
Days Outstanding in March
+ Days in April
Days Outstanding in March/April
+ Days in May to Equal 90 (PLUG)
Total Life of Note
31
1
30
30
60
30
90
days
days
days
days
days
days
9-72
Promissory Notes
Example
How much total cash will Beautiful
Cosmetics pay at maturity?
9-73
Promissory Notes
Example
How much total cash will Beautiful
Cosmetics pay at maturity?
Note Principal
Interest
Total Cash Paid
$9,000
270
$9,270
Interest = $9,000 × 12% × 90/360
9-74
Promissory Notes
Example
How much total cash will Beautiful
Cosmetics pay at maturity?
Note Principal
Interest
Total Cash Paid
$9,000
270
$9,270
Prepare the journal entries at maturity for
Beautiful Cosmetics and Business Machines, Inc.
9-75
Promissory Notes
Example
Beautiful Cosmetics
GENERAL JOURNAL
Date
Description
May 30 Notes Payable
Interest Expense
Cash
To record note payment
Page 84
Post.
Ref.
Debit
Credit
9,000
270
9,270
9,270
9-76
Promissory Notes
Example
Business Machines, Inc.
GENERAL JOURNAL
Date
Description
May 30 Cash
Page 93
Post.
Ref.
Debit
Credit
9,270
Interest Revenue
270
Notes Receivable
9,000
To record cash receipt
9-77
Accruing Interest
If a note is still outstanding at the end of
the accounting period, an adjusting
entry is required to record the accrued
interest on both the maker’s and
payee’s books.
Maker’s Adjusting Entry
Interest Expense
Interest Payable
Dr.
Cr.
9-78
Accruing Interest
If a note is still outstanding at the end of
the accounting period, an adjusting
entry is required to record the accrued
interest on both the maker’s and
payee’s books.
Payee’s Adjusting Entry
Interest Receivable
Interest Revenue
Dr.
Cr.
9-79
Dishonored Notes
Maker . . .

Fails to pay amounts
due at maturity.

Records Interest
Expense and Interest
Payable.
9-80
Dishonored Notes
Payee . . .

Transfers Note
Receivable to
Accounts Receivable.

Records Interest
Revenue and Interest
Receivable.
Two Types of
Promissory Notes
Interest-bearing
A/K/A “Straight Loan”
 Interest is paid at maturity
 Borrower receives cash
equal to amount of note

Noninterest-bearing
A/K/A “Discounted” note
 Interest is withheld by bank up front
 Borrower receives cash equal to
amount of the note less interest

9-81
Interest-Bearing Note
(“Straight” Loan)
This one is relatively simple.
For example, borrower asks bank for
$20,000 and receives $20,000, then makes
the following journal entry:
Cash
Notes Payable
20,000
20,000
9-82
Non-Interest-Bearing Note
(Discounted Note)

Uses a new account,
Discount on Notes Payable
Is a contra-liability account
 Normal balance is debit


Initial account balance is the difference
between the note’s maturity value and
the cash proceeds received by borrower


i.e., represents interest withheld by bank
This amount is allocated to interest
expense over life of note
9-83
Non-Interest-Bearing Note
9-84
Example
On March 1, 1999 Hillbilly Sounds, Inc. discounted
a $20,000, 6-month, non-interest-bearing note at
American Bank at 9%. On Sept. 1, 1999 Hillbilly
Sounds pays American Bank in full. How would
these entries be recorded by Hillbilly Sounds?
9-85
Non-Interest-Bearing Note
Example
GENERAL JOURNAL
Page 1
Date
Description
PR
3/1/99 Cash
Discount on Notes Payable
Notes Payable
To record discounting of note
$20,000 × .09 × ½ = $900 bank discount
Debit
Credit
19,100
900
20,000
9-86
Non-Interest-Bearing Note
Example
GENERAL JOURNAL
Page 1
Date
Description
PR
3/1/99 Cash
Discount on Notes Payable
Notes Payable
To record discounting of note
$20,000 × .09 × ½ = $900 bank discount
CONTRA-LIABILITY
ACCOUNT
Debit
Credit
19,100
900
20,000
Non-Interest-Bearing Note
Example
Partial Balance Sheet at March 1, 1999
Current Liabilities:
Notes Payable
Less: Discounts on Notes Payable
$ 20,000
900
19,100
Carrying
Value
9-87
9-88
Non-Interest-Bearing Note
Example
At maturity on Sept. 1, 1999, Hillbilly Sounds, Inc.
pays American Bank in full.
GENERAL JOURNAL
Page 1
Date
Description
PR
9/1/99 Notes Payable
Interest Expense
Discount on Notes Payable
Cash
To record interest and note payment
Debit
Credit
20,000
900
900
20,000
9-89
WE ARE SAILING
RIGHT ALONG!!