CHAPTER
8
ACCOUNTS RECEIVABLES
Chapter
8-1
Receivables
Claims held against customers and others
money, goods, or services.
Chapter
8-2
for
Oral promises of the
purchaser to pay for
goods and services sold.
Written promises to pay
a sum of money on a
specified future date.
Accounts
Receivable
Notes
Receivable
LO 3 Define receivables and identify the different types of receivables.
Receivables
Nontrade Receivables
1.
2.
3.
4.
5.
6.
Advances to officers and employees.
Advances to subsidiaries.
Deposits to cover potential damages or losses.
Deposits as a guarantee of performance or payment.
Dividends and interest receivable.
Claims against:
a)
b)
c)
d)
e)
f)
Chapter
8-3
Insurance companies for casualties sustained.
Defendants under suit.
Governmental bodies for tax refunds.
Common carriers for damaged or lost goods.
Creditors for returned, damaged, or lost goods.
Customers for returnable items (crates, containers, etc.).
LO 3 Define receivables and identify the different types of receivables.
Receivables
Nontrade Receivables
Illustration 7-3
Chapter
8-4
LO 3 Define receivables and identify the different types of receivables.
Recognition of Accounts Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the gross method.
June 3
Accounts receivable
2,000
Sales
June 12
Cash ($2,000 x 98%)
Sales discounts
Accounts receivable
Chapter
8-5
2,000
1,960
40
2,000
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
How are these accounts presented on the Balance
Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
8-6
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Assets
Current Assets:
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-7
$
500
(25)
346
475
812
40
1,673
$
5,679
6,600
(3,735)
8,544
10,217
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-8
$
$
346
475
812
40
1,673
5,679
6,600
(3,735)
8,544
10,217
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
100
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
8-9
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
8-10
100
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
8-11
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-12
333
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-13
333
15
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-14
333
Coll.
15
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-15
333
Coll.
10
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
Chapter
8-16
257
333
Coll.
10
W/O
10
Allowance for
Doubtful Accounts
W/O
25
Beg.
15
Est.
30
End.
10
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Assets
Current Assets:
Cash
Accounts receivable, net of $30 allowance
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-17
$
$
13
227
812
40
1,092
5,679
6,600
(3,735)
8,544
9,636
LO 4 Explain accounting issues related to recognition of accounts receivable.
Valuation of Accounts Receivable
Reporting Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected.
Chapter
8-18
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Uncollectible Accounts Receivable
An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
 a decrease in the asset accounts receivable and
 a related decrease in income and stockholders’ equity.
Chapter
8-19
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
net realizable value
Not GAAP
Chapter
8-20
Allowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-ofreceivables
GAAP
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Income
Statement
Approach
Balance
Sheet
Approach
Chapter
8-21
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach - matches costs with
revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship
between previous years’ credit sales and bad debts.
Chapter
8-22
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach
Illustration: Chad Shumway Corp.
estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-23
8,000
8,000
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Receivables Approach
 not matching.
 reports receivables at net realizable value.
Companies may apply this method using
 one composite rate, or
 an aging schedule of accounts receivable.
Chapter
8-24
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-25
37,650
37,650
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Bad Debt Expense ($37,650 – $800)
Allowance for Doubtful Accounts
Chapter
8-26
36,850
36,850
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
Chapter
8-27
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-28
7,500
7,500
($800,000 – $50,000) x 1% = $7,500
LO 5
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-29
6,000
6,000
($160,000 x 5%) – $2,000) = $6,000
LO 5
Uncollectible Accounts Receivable
Summary
Percentage of Sales approach:
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.
Percentage of Receivables approach:
Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.
Chapter
8-30
LO 5 Explain accounting issues related to valuation of accounts receivable.