Receivables
Chapter 8
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1
Receivables
• Monetary Claims
• Arise from selling goods and services on
credit and lending money
• Two major types
– Accounts Receivable – current asset
– Notes Receivable – current or long-term asset
depending on when the note matures
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2
Objective 1
Design internal controls for
receivables
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3
Internal Controls & Receivables
• Separation of cash-handling and cashaccounting duties
• Establish credit department
– Evaluates customers for credit worthiness
– Pursues collection from customers
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Receivables & Accounting Issues
• Balance Sheet should report receivables
at the amount the company expects to
collect (net realizable value)
• Income Statement should report the
expense associated with the failure to
collect (uncollectible accounts expense)
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Objective 3
Understand the direct write-off
method for uncollectibles
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Direct Write-Off
Assume that on November 9, 2006 we sell on
account, 2/10, n/30 $5,000 of merchandise.
What’s the journal entry to record the sale?
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Nov 9 Accounts Receivable
Sales
Record sale on account
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DEBIT
CREDIT
5,000
5,000
7
Direct Write-Off Method
Assume that it is April 30 of the next year and the
company has determined that it will not be able to
collect on this account. Prepare the journal entry
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Apr 30 Uncollectible Accounts Expense
Accounts Receivable
DEBIT
CREDIT
5,000
5,000
To write off a bad debt
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8
Direct Write-Off Method
Nov 9
Dec 31
End of Fiscal Year
Sale
Recorded
Apr 30
Expense
Recorded
Expenses should be matched with revenues in
same accounting period. Bad debts arising from
2006 sales should be treated as 2006 expenses.
The direct write-off method violates the matching
principle. This method is acceptable only when
uncollectibles are very low
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Objective 2
Use the allowance method to
account for uncollectibles
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Allowance Method
Nov 9
Dec 31
End of Fiscal Year
Apr 30
The Allowance Method has two advantages:
1. Expenses are matched with revenues in the
same accounting period
2. Accounts
Receivables entry
are reported on
Prepare
adjusting
balance sheet at the amount of cash
based
on toestimates
expected
be collected
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Allowance Method
Operating expense
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Dec 31 Uncollectible Accounts Expense
Allowance for Uncollectible
Accounts
To estimate bad debts for period
Contra-asset account
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Allowance Method
Accounts Receivable – reported on balance
Gross
sheet at its “net realizable value”
amount
Accounts Receivable
$750,000
Allowance for Doubtful Estimated
Accounts
(3,500)
uncollectible
$746,500
Expected
to be
collected
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Estimating Uncollectibles
• Two Methods
– Percent of Sales – Income Statement
Approach
– Aging of Accounts Receivable – Balance
Sheet Approach
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Percent of Sales Method
Bad debts expense = Net Credit Sales x Bad Debt %
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S8-3
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31Uncollectible accounts expense
DEBIT
CREDIT
7,000
Allowance for uncollectible
accounts
7,000
Expense = (350,000 x .02) = 7,000
When you use the percentage of sales method, you
are estimating the amount of the bad debts expense.
Since temporary accounts start the accounting
period with a -0- balance, all you have to do is take
the percentage times the revenue
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S8-3
Accounts Receivable
Allowance for
Uncollectible Accounts
40,000
Bal -07,000
Bal 7,000
Balance Sheet (partial):
Accounts receivable
Less: Allowance for uncollectible accounts
Accounts receivable, net
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$40,000
(7,000)
$33,000
17
Aging of Accounts Receivable
Method
1. Accounts receivables are grouped according to
age
2. Each age group has a different likelihood of
being uncollectible (the older the receivable, the
less likely it will be collected)
3. Add uncollectible amounts together to compute
desired balance in the Allowance for
Uncollectible Accounts
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This method is called the balance sheet approach because
you are estimating the balance that should be in the
Allowance for Uncollectible Accounts after posting the
adjusting entry
E9-17
Age of Accounts Receivable
Accounts
Receivable
1-30 Days
$300,000
$140,000
Estimated %
uncollectible
Total
.5%
$700
31-60
Days
61-90
Days
$80,000
$70,000
$10,000
2%
$1,600
6%
$4,200
50%
$5,000
Desired balance in Allowance
for Uncollectible Accounts
Over 90
Days
$11,500
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E8-17
Notice: The accounts debited and credited are the same
If the desired balance is $11,500 and you already have
using either the income statement approach or the balance
$8,900 in the account, you need to credit the account for
sheet approach. It is the way the estimated amounts are
$2,600 more
Allowance
computed that vary.
Accounts Receivable
for
Uncollectible Accounts
300,000
Bal 8,900
2,600
Bal 11,500
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dec 31Uncollectible accounts expense
DEBIT
2,600
Hint: With the percentage of sales method, you do not
Allowance
forthe
uncollectible
have
to worry about
balance in the allowance to
accounts
determine
the dollar amount in the adjusting entry. With
the aging of receivables method, you do need to consider
the existing balance in determining the amount
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CREDIT
2,600
20
E8-17
Accounts Receivable
Allowance for
Uncollectible Accounts
300,000
Bal 8,900
2,600
Bal 11,500
Balance Sheet (partial):
Accounts receivable
$300,000
Less: Allowance for uncollectible accounts
(11,500)
Accounts receivable, net
$288,500
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Writing Off Uncollectible Accounts
S8-7
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Jan 19 Allowance for Uncollectible
Accounts
600
Accounts Receivable - Lance
Under the allowance method, the expense is 600
Emmert
recognized as an adjusting entry. The
To write off an account
balance in the Allowance account represents
the amount of uncollectible receivables.
When a specific account is determined to be
uncollectible during the year, the allowance
account needs to be reduced (debit) as does
the accounts receivable (credit).
This journal entry has no effect on the net
receivables
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Writing Off Uncollectible Accounts
S8-7
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Dec 31 Accounts Receivable-Lance
Emmert
600
Allowance for Uncollectible
Accounts
600
To re-instate an When
account
an account already written off is
collected, reverse the first entry and then
already written off
record the receipt of cash. Even though
Accounts Receivable is credited in the
31 Cash
600
first entry and debited for the same
Accounts Receivable-Lance
amount in the second entry, it is important
to show in your records that the account 600
Emmert
was re-established
To record collection
on account and then paid off
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23
Credit Card, Bankcard, Debit-Card
Sales
One way to avoid risk of Bad Debts is to accept credit cards like Visa or
American Express. The credit card company charges the retailer a fee
(between 1 and 5% of the charge).
Bank credit cards are deposited in bank like cash. Record a debit to cash
and Bankcard Discount Expense and credit Sales Revenue
Other credit cards receipts, like Discover and American Express, must be
debited to Accounts Receivable until the cash is actually collected.
Debit-Card Sales: Just like a cash transaction, no discount expense.
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S8-8
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Account Receivable-American
Express
Credit-Card Discount Expense
Sales Revenue
Cash
Bankcard Discount Expense
Sales Revenue
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DEBIT
CREDIT
9,800
200
10,000
7,880
120
8,000
25
Objective 4
Account for notes receivable
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Notes Receivable
• A note is a written promise to pay a
specific amount at a specific future date
• Interest - price paid by a borrower for
using a lender’s money
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Notes ReceivableInterest
starts
PROMISSORY NOTE
Oct. 4, 2007
_____________
Payee
Date
$10,000.00
______________
Amount
Principal
For value received, I promise to pay to the order of First National Bank
Ten thousand and no/100---------------------Dollars
__________________________________
January 2, 2008
on ______________________________
plus interest at the annual rate of 12%.
Maturity
Date
Maker
Jeanette Sims
________________________
Interest
Rate
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Maturity Value
Principal + Interest due at maturity
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Identifying Maturity Date
• Stated in terms of months - maturity date
is determined by counting the months from
the date of issue, and falls on same day of
the month as date the note was issued
• Stated in terms of days - maturity date is
determined by counting the days from the
date of issue (do not count the day on
which the note is dated, but do count the
day on which it comes due)
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Determine the Maturity Date
• A 60-day note dated Oct 4, 2006 is issued.
Determine the due date:
Number of days on note
60
Days in October
31
Date of note
4
Days outstanding in October
27
Days remaining on note
33
Days in November
30
December due date
3
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Computing Interest
Interest = Principal x Interest Rate x Time
If the note is
expressed in
months,
base
days, base
a
ayear
yearon
on360
12
months
days.
Remember, the interest rate is an annual rate. If you take Principal x
Interest rate, you compute the amount of interest on a one year note. This
is why you must multiply by the time the note is outstanding
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S8-9
Note 1:
Note 2:
Note 3:
Note 4:
$50,000 x 10% x 3/12 = $1,250
$10,000 x 9% x 60/360 = $150
$15,000 x 12% x 75/360 = $375
$100,000 x 8% x 6/12 = $4,000
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Accounting for Notes Receivable
S8-10
First – what is the due date?
GENERAL JOURNAL
DATE
May
Aug
DESCRIPTION
Number of days on note
6 Note
Receivable-B Milam
Days
in May
Date Cash
of note
Days outstanding in May
Days remaining on note
4 Cash
Days
in June
REF
DEBIT
CREDIT
90
31
6
100,000
Interest Revenue
Days Note
in JulyReceivable-B Milam
Due date in August
100,000
25
65
30
2,500
35
31 100,000
4
Next – what is the amount of interest on this note?
100,000 x .1 x 90/360 = 2,500
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Accruing Interest Revenue
Date of Note,
Aug 1, 2008
End of Fiscal Year,
Dec 31, 2008
Maturity Date,
Aug 1, 2009
Prepare
adjusting
In the previous example,
the note was
created andentry
matured within the
same accounting
period. In E8-8,
the note
spans twoin
accounting
to record
interest
earned
20X8 periods.
When a note spans two accounting periods, you need to allocate some of
the interest to each period. In this example, 5 months’ interest would be
accrued for 2008 (Aug 1-Dec 31). The other 7 months’ of interest would
be recognized in 2009
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E8-8
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2008
Feb 12 Bankcard Discount Expense
Cash
Sales
2,000
98,000
1 Notes Receivable – J Porter
Cash
20,000
Aug
Dec 31 Interest Receivable
Interest Revenue
(20,000 x .12 x 5/12)
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100,000
20,000
1,000
1,000
36
E8-8
Eliminate balance carried forward
from last year now that you have
actually received the interest
GENERAL JOURNAL
payment
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2009
Aug
1 Cash
Interest Receivable
Interest Revenue
Note Receivable – J Porter
22,400
1,000
1,400
20,000
Interest revenue = 20,000 x .12 x 7/12
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When a maker of the note defaults on the
note, the maturity value of the note
receivable is transferred to accounts
receivable because the note has expired
Dishonored Notes Receivable
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Accounts Receivable
Interest Revenue
Note Receivable
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DEBIT
CREDIT
10,100
100
10,000
38
Objective 5
Report receivables on the balance
sheet
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Reporting Receivables
Two approaches:
Accounts receivable
Less: Allowance for uncollectible
accounts
Accounts receivable, net
Or
Accounts receivable, net of allowance
for uncollectible accounts of $500
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$5,000
(500)
$4,500
$4,500
40
Objective 6
Use the acid-test ratio and days’
sales in receivables to evaluate a
company
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Acid-Test Ratio
• Also called the “quick ratio”
• Stringent measure of liquidity
• Measures entity’s ability to pay its current
liabilities immediately
(Cash + Short-term investments + Net current
receivables) ÷ Total current liabilities
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E8-23 (a)
(Cash + Short-term investments + Net current
receivables) ÷ Total current liabilities
For 20X8:
(10,000 + 11,000 + 68,000) ÷ 107,000 = .83
For 20X9:
(3,000 + 23,000 + 53,000) ÷ 104,000 = .76
The acid-test ratio is not as good in 2009 as it was in 2008.
Cherokee’s acid-test ratio for 2009 is slightly lower than the industry
average of .80
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Days’ Sales in Receivables
• Also called “collection period”
• How many days does it take to collect the
average level of receivables?
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Days’
Sales in Receivables
(Beginning net receivables + Ending net receivables)/2
Average net A/R =
One day’s sales = Net sales ÷ 365 days
Days’ sales in average accounts receivable =
Average net accounts receivable ÷ One day’s sales
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E8-24
One day’s sales = 600,060 ÷ 365 days = $1,644
Days’ sales in average accounts receivable =
((42,800 + 38,200)/2) ÷ 1,644 =
40,500 / 1,644 = 24.6 days
Answer to part 2: Swiftmedia’s collection period of 25 days is a little
shorter than the company’s normal credit terms of 30 days.
This is good for the company because it means the company receives cash
quickly and can put its cash to work with little delay
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End of Chapter 8
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