Cash and Receivables
Sid Glandon, DBA, CPA
Associate Professor of Accounting
1
Cash and Cash Equivalents
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Cash
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coin and currency
demand deposits
Cash equivalents
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Short-investments (90 days)
Money market funds
Treasury bills
Commercial paper
2
Internal Controls
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Separation of duties
Checking accounts
Petty cash funds
Physical protection of cash
Protection of the accounting information
system records
Bank reconciliations
3
Bank Reconciliation
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Three steps
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Reconciliation per bank
Reconciliation per book
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Adjusting journal entries
4
Items Not Considered Cash
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Overdraft without the right of offset
Restricted cash accounts
Investments
Post dated checks from customers
Loans to employees
5
Restricted Cash
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Not available to cover current liabilities
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Bond sinking funds
Compensating balances
6
Receivables
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Accounts receivable (Trade)
Notes receivable
Nontrade receivables
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Advances to officers and employees
Advances to subsidiaries
Deposits
Dividends and interest receivable
Claims against others
7
Initial Valuation
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Initial valuation is the amount expected to be
received, converted into cash within operating
cycle
 Trade discounts
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Selling price less than normal list price
Cash or sales discounts
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Incentive for paying invoice on time
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gross method
net method
8
Subsequent Valuation
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Sales Returns
Uncollectible accounts
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Allowance method
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Balance sheet approach
Income statement approach
9
Bad Debt Expense
Balance Sheet Approach, Allowance Method
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Prepare a schedule of aged accounts
receivable
Determine amount or percentage that will
likely not be collected
Adjust the allowance account to reflect the
computed amount by
Journalize
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Bad debt expense-debit
Allowance for doubtful accounts-credit
10
Bad Debt Expense
Balance Sheet Approach, Allowance Method
ACCOUNT
DEBIT CREDIT
Bad debt expense
XXX
Allowance for doubtful accounts
XXX
To adjust the allowance for doubtful accounts
11
Bad Debt Expense
Income Statement Approach, Net Sales Method
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Determine net credit sales
Calculate estimated percentage of bad
debt expense against net credit sales
Journalize
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Bad debt expense-debit
Allowance for doubtful accounts-credit
12
Bad Debt Expense
Income Statement Approach, Net Sales Method
ACCOUNT
DEBIT CREDIT
Bad debt expense
XXX
Allowance for doubtful accounts
XXX
To record bad debt expense for the year
13
Balance Sheet Approach, Allowance Method
T-Account: Allowance for Doubtful Accounts
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Beginning credit balance
Debit allowance account to write-off accounts
as uncollectible
Credit allowance account to reinstate
accounts previously written-off
Analyze unadjusted year-end balance
Determine required ending balance
Prepare adjusting journal entry to achieve
required ending balance
14
T-Account: Allowance for Doubtful Accounts
Date
1/1/06
2006
2006
12/31/06
12/31/06
12/31/06
Description
Beginning balance
Accounts written-off during the year
Accounts reinstated, previously written-off
Unadjusted ending balance
Required adjusting journal entry
Required ending balance
Debit
Credit
$25,000
$15,000
5,000
15,000
5,000
$20,000
15
Writing-Off of Uncollectible Accounts
Date
2006
Account
Debit
Credit
Allowance for doubtful accounts
$15,000
Accounts receivable
$15,000
To record the write-off of uncollectable accounts receivable during 2006.
16
Reinstatement of Previously Written-Off
Accounts and Collection in Current Year
Date
2006
Date
2006
Account
Debit
Credit
Accounts receivable
$5,000
Allowance for doubtul accounts
$5,000
To record the reinstatement of accounts previously written-off.
Account
Debit
$5,000
Cash
Accounts receivable
To record the collection on accounts previously written-off.
Credit
$5,000
17
Adjusting the Allowance Account at Year-End
and Recording Bad Debt Expense
Date
Account
12/31/06 Bad debt expense
Allowance for doubtful accounts
Debit
$5,000
Credit
$5,000
To adjust the allowance account based on an analysis of the collectibility
of accounts receivable and record bad debt expense for the year of 2006.
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Balance Sheet Presentation
ASSETS
Current Assets:
Cash
Accounts receivable
Less allowance for doubtful accounts
Net realizable receivables
Total current assets
XXX
XXX
XXX
XXX
XXX
19
Recognition of Notes Receivable
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Interest-bearing notes
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Note issued at face value
Repayment of face amount plus interest
Noninterest-bearing notes
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Zero-interest-bearing notes
Note issued at discount, interest is imputed
at market rate
Repayment of face amount
20
Financing with Receivables
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Secured borrowing
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Sales of receivables
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Assigned or pledged
Factoring
Securitization
Sales without recourse
Sales with recourse
21
Discounting a Note
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Step #1, Accrued interest to the date of
discount
Step #2, Calculate the maturity value of
the note
Step #3, Calculate the discount
Step #4, Calculate the cash proceeds
22