Receivables
BY RACHELLE AGATHA, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac
Objectives:
1. Describe the common
classifications of receivables.
2. Describe the nature of and the
accounting for uncollectible
receivables.
3. Describe the direct write-off
method of accounting for
uncollectible receivables.
2
Objective
4. Describe the allowance method of
accounting for uncollectible
receivables.
5. Compare the direct write-off and
allowance methods of accounting
for uncollectible accounts.
3
Objectives:
6. Describe the nature,
characteristics, and accounting for
notes receivables.
7. Describe the reporting of
receivables on the balance sheet.
4
Objective 1
Describe the
common
classifications
of receivables.
5
Classification of Receivables
The term receivables
includes all money claims
against other entities,
including people, business
firms, and other
organizations.
6
Accounts Receivable
Accounts
receivable are
normally expected to
be collected within a
relatively short period,
such as 30 or 60 days.
7
Notes Receivable
Notes receivable are
amounts that customers
owe for which a formal,
written instrument of
credit has been issued.
8
Other Receivables
Other receivables expected to
be collected within one year are
classified as current assets. If
collection is expected beyond
one year, these receivables are
classified as noncurrent assets
and reported under the caption
Investments.
9
Objective 2
Describe the
nature of and the
accounting for
uncollectible
receivables.
10
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.
11
Uncollectible Receivables
There are two methods of
accounting for receivables that
appear to be uncollectible: the
direct write off method and
the allowance method.
12
 The direct write off
method records bad debt
expense only when an account is
judged to be worthless.
 The allowance method
records bad debt expense by
estimating uncollectible accounts
at the end of the accounting
period.
13
Objective 3
Describe the direct
write-off method of
accounting for
uncollectible
receivables.
14
Direct Write-Off Method
On May 10, a $4,200 accounts
receivable from D. L. Ross has
been determined to be
uncollectible.
May 10 Bad Debt Expense
4 200 00
Accounts Receivable—D. L. Ross
15
4 200 00
The amount written off is later
collected on November 21.
Nov. 21 Accounts Receivable—D. L. Ross
Bad Debt Expense
21 Cash
Accounts Receivable—D. L. Ross
4 200 00
4 200 00
4 200 00
4 200 00
16
Journalize the following transactions using
the direct write-off method of accounting
for uncollectible receivables.
July 9 Received $1,200 from Jay Burke
and wrote off the remainder owed
of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay
Burke and received $3,900 cash in full
payment.
17
July 9 Cash
1,200
Bad Debt Expense
3,900
Accounts Receivable—Jay Burke
5,100
Oct. 11 Accounts Receivable—Jay Burke 3,900
Bad Debt Expense
3,900
11 Cash
3,900
Accounts Receivable—Jay Burke
3,900
18
Objective 4
Describe the
allowance method of
accounting for
uncollectible
receivables.
19
Allowance Method
On December 31, ExTone Company
estimates that a total of $40,000 of the
$1,000,000 balance in her company’s
Accounts Receivable will eventually be
uncollectible.
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
40 000 00
40 000 00
Uncollectible accounts
estimate.
20
Net Realizable Value
The net amount that is expected to be
collected, $960,000 ($1,000,000 –
$40,000), is called the net
realizable value (NRV). The
adjusting entry reduces receivables to
the NRV and matches uncollectible
expenses with revenues.
21
On January 21, John Parker’s account
totaling $6,000 is written off because it is
uncollectible.
Jan. 21 Allowance for Doubtful Accounts
Accounts Receivable—John Parker
6 000 00
6 000 00
To write off the
uncollectible account.
22
23
During 2008, ExTone Company
writes off $36,750 of uncollectible
accounts, including the $6,000
account of John Parker. After
posting all entries to write-off
uncollectible amounts, the
Allowance for Doubtful
Accounts will have a credit balance
of $3,250 ($40,000 – $36,750).
24
ALLOWANCE FOR DOUBTFUL ACCOUNTS
{
Total
accounts
written off
$36,750
Jan. 21
Feb. 2
“
“
6,000
3,900
“
“
Jan. 1, 2008 Bal.
Dec. 31 Unadjusted
bal
40,000
3,250
25
If ExTone Company had
written off $44,100 in
accounts receivable during
2008, the Allowance for
Doubtful Accounts would
have a debit balance of
$4,100.
26
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal.
40,000
Total
Jan. 21
6,000
accounts
3,900
written off Feb. 2
“
“
$44,100
“
“
Dec. 31 Unadjusted bal
4,100
{
27
Collecting a Written-Off Account
Nancy Smith’s account of $5,000
which was written off on April 2
is later collected on June 10.
Two entries are needed: one to
reinstate Nancy Smith’s account
and a second to record receipt of
the cash.
28
Entry 1: Reinstate the
account.
June 10 Accounts Receivable—Nancy Smith
Allowance for Doubtful Accounts
To reinstate the account
written off on Jan. 21.
5 000 00
5 000 00
29
Entry 2: Record collection of
cash.
June 10 Cash
Accounts Receivable—Nancy Smith
Collection of written-off
account.
5 000 00
5 000 00
30
Journalize the following transactions using
the allowance method of accounting for
uncollectible receivables.
July 9 Received $1,200 from Jay Burke
and wrote off the remainder owed of
$3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay
Burke and received $3,900 cash in full
payment.
31
July 9 Cash
1,200
Allowance for Doubtful Accounts 3,900
Accounts Receivable—Jay Burke
5,100
Oct. 11 Accounts Receivable—Jay Burke 3,900
Allowance for Doubtful Accounts
3,900
11 Cash
3,900
Accounts Receivable—Jay Burke
3,900
32
Estimating Uncollectibles
The allowance method uses two
ways to estimate the amount
debited to Bad Debt Expense.
1. Estimate based on a
percentage of sales. (Income
statement method)
2. Estimate based on analysis of
receivables. (Balance Sheet
Method)
33
Estimate Based on a Percentage
of Sales
If credit sales for the period are
$3,000,000 and it is estimated that
1½ % will be uncollectible, the Bad
Debt Expense is debited for
$45,000 ($3,000,000 x .015). This
approach disregards the balance in
the allowance account before the
adjustment.
34
After this adjusting entry is posted,
Allowance for Doubtful
Accounts will have a balance of
$48,250.
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts
($3,000,000 x 0.015 =
$45,000).
45 000 00
45 000 00
35
BAD DEBT EXPENSE
Dec. 31 Adj entry
45,000
Dec. 31 Adjusted bal.45,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal.
40,000
Total
Jan. 1 6,000
accounts
Feb. 2 3,900
written off
“
$36,750
“
Dec. 31 Unadjusted bal 3,250
Dec. 31 Adj. entry
45,000
Dec. 31 Adjusted bal. 48,250
{
Income statement method
calculates the adjustment
36
At the end of the current year, Accounts Receivable
has a balance of $800,000; Allowance for Doubtful
Accounts has a credit balance of $7,500; and net
sales for the year total $3,500,000. Bad debt
expense is estimated at ½ of 1% of net sales.
Determine (a) the amount of the adjusting entry for
uncollectible accounts; (b) the adjusted balances of
Accounts Receivable, Allowance for Doubtful
Accounts, and Bad Debt Expense; and (c) the net
realizable value of accounts receivable.
37
Adjusting entry (a)
(a) $17,500 ($3,500,000 x .005
( ½ of 1%) )
Balances (b)
Adjusted Balance
(b) Accounts Receivable
$800,000
Allowance for Doubtful Accounts
($7,500 + $17,500)
25,000
Bad Debt Expense
17,500
NRV (c)
(c) $775,000 ($800,000 – $25,000)
38
Estimating Uncollectibles Based
on Analysis of Receivables
The longer an account receivable is
outstanding, the less likely that it will be
collected. Basing the estimate of
uncollectible accounts on how long
specific amounts have been outstanding
is called aging the receivables.
39
Aging of Accounts
Receivables
40
Estimate of
Uncollectible Accounts
41
Collection Rates by Number of
Months Past Due
42
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
Bad Debt Expense must be
debited for $2,880 ($3,390 –
$510).
43
Estimate Based on Analysis of
Receivables
Aug. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts
($3,390 – $510).
2 880 00
2 880 00
44
BAD DEBT EXPENSE
Aug. 31 Adj. entry 2,880
Aug. 31 Adj. bal. 2,880
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Unadj. bal. 510
Aug. 31 Adj. entry 2,880
Aug. 31 Adj. bal. 3,390
Balance sheet method
finds the ending balance
and adjust to that
45
If the unadjusted balance of
Allowance for
Uncollectible Accounts
had been a debit balance of
$300, the amount of the
adjustment would have been
$3,690 ($3,390 + $300).
46
BAD DEBT EXPENSE
Aug. 31 Adj. entry 3,690
Aug. 31 Adj. bal. 3,690
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Unadj. bal. 300 Aug. 31 Adj. entry 3,690
Aug. 31 Adj. bal. 3,390
47
At the end of the current year, Accounts Receivable
has a balance of $800,000; Allowance for Doubtful
Accounts has a credit balance of $7,500; and net
sales for the year total $3,500,000. Using the aging
method, the balance of Allowance for Doubtful
Accounts is estimated as $30,000.
Determine (a) the amount of the adjusting entry for
uncollectible accounts; (b) the adjusted balances of
Accounts Receivable, Allowance for Doubtful
Accounts, and Bad Debt Expense, and (c) the net
realizable value of accounts receivable.
48
(a) $22,500 ($30,000 – $7,500)
Adjusted Balance
(b) Accounts Receivable
$800,000
Allowance for Doubtful Accounts
30,000
Bad Debt Expense
22,500
(c) $770,000 ($800,000 – $30,000)
49
Objective 5
Compare the direct
write-off and
allowance methods of
accounting for
uncollectible
accounts
50
Comparing Direct-Write-Off and Allowance Methods
Direct Write-Off Method
W/O Acct
Recvd partial pmt w/o rest
Recvd pmt of previously w/o acct
W/O Acct
Co Used the % of credit sales and est
uncoll exp
Allowance Method
W/O Acct
Recvd partial pmt w/o rest
Recvd pmt of previously w/o acct
W/O Acct
51
Co Used the % of credit sales and est uncoll exp
51
Comparing the Direct Write-Off and
Allowance Methods
Direct Write-Off Method
Amount of bad debt
expense recorded
Allowance account
Primary users
When the actual
accounts receivable are
determined to be
uncollectible
No allowance account is
used
Small companies and
companies with
relatively few receivables
52
Comparing the Direct Write-Off and
Allowance Methods
Allowance Method
Amount of bad debt
expense recorded
Using estimate based on
either (1) a percentage of
sales or (2) analysis of
receivables.
Allowance account
The allowance account
is used
Primary users
Large companies and
those with a large
amount of receivables
53
Objective 6
Describe the nature,
characteristics, and
accounting for notes
receivable.
54
Characteristics of Notes Receivable
A note receivable, or promissory
note, is a written document
containing a promise to pay:
• a specific amount of money (face
amount)
• on demand or at a definite time
• to an individual or a business
(payee), or to the bearer or holder
of the note.
55
Characteristics of Notes Receivable
The one making the promise
is called the maker. The
date a note is to be paid is
called the due date or
maturity date.
56
Payee
2,500.00
$_____________
March 16
08
Fresno, California______________20___
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Ninety days
Judson Company
THE ORDER OF ____________________________________________
Two
thousand five hundred 00/100--------------------------_________________________________________________DOLLARS
City National Bank
PAYABLE AT ______________________________________________
VALUE RECEIVED WITH INTEREST AT ____
NO. _______
14 DUE___________________
June 14, 2008
10%
Maker
H. B. Lane
TREASURER, WILLIARD COMPANY
57
What is the due date of a 90-day note dated
March 16?
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
58
Accounting for Notes Receivable
Received a $6,000, 12%, 30-day
note dated November 21, 2008 in
settlement of the account of W. A
Bunn Co.
Nov. 21 Notes Rec.—W. A. Bunn Co.
Accts. Rec.—W. A Bunn Co.
Received 30-day, 12%
note dated November
21, 2008.
6 000 00
6 000 00
59
On December 21, when the note matures,
the firm receives $6060 from W. A. Bunn
Company ($6,000 plus $60 interest).
Dec. 21 Cash
Notes Rec.—W. A. Bunn Co.
Interest Revenue*
Received principal and
6 060 00
6 000 00
60 00
interest on matured note.
*$6,000 x 12% x 30/360 = $60
60
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.
Dec. 21 Accts Rec.—W. A. Bunn Co.
Notes Rec.—W. A. Bunn Co.
Interest Revenue
Recorded dishonored
6 060 00
6 000 00
60 00
note, plus interest.
61
A 90-day, 12% note dated December 1, 2008, is
received from Crawford Company to settle its
account, which has a balance of $4,000.
2008
Dec. 1 Notes Rec.—Crawford Co.
Accts. Rec.—Crawford Co.
Accepted note in
settlement of
account.
4 000 00
4 000 00
62
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).
2008
Dec. 31 Interest Receivable
Interest Revenue
40 00
40 00
Accrued interest
($4,000 x 12% x
30/360).
63
On March 1, 2009, $4,120 is received for
the note ($4,000) and interest ($120).
2009
Mar. 1 Cash
4 120 00
Notes Rec.—Crawford Co.
Interest Receivable
Interest Revenue
Collected note and
accrued interest.
4 000 00
40 00
80 00
($4,000 x 12% x
30/360).
64
Same Day Surgery Center received a 120-day,
6% note for $40,000, dated March 14 from a
patient on account.
a. Determine the due date of the note.
b. Determine the maturity value of the
note.
c. Journalize the entry to record the
receipt of the payment of the note at
maturity.
65
a.
July 12 determined as follows:
March
April
May
June
July
Total
17 days (31 – 14)
30 days
31 days
30 days
12 days
120 days
b. $40,800 [$40,000 + ($40,000 x 6% x 120/360)]
c. Cash
40,800
Notes Receivable
Interest Revenue
40,000
800
66
Objective 7
Describe the
reporting of
receivables on the
balance sheet.
67
Receivables on Balance Sheet
Accounts Receivable Turnover
The accounts receivable turnover
measures how frequently during the year
the accounts receivable are being converted
to cash.
Accounts Receivable
=
Turnover
Net sales
Avg accounts receivable
69
Federal Express Corporation
2005
Net sales
$19,364
Accounts receivable
2,703
Avg accounts receivable 2,589
2004
2003
$17,383
2,475
2,337
--$2,199
*
*
[($2,475 + $2,199)/2]
Accounts Receivable $17,383
=
$2,337
Turnover (2004)
Accounts Receivable= 7.4
Turnover (2004)
70
Federal Express Corporation
2005
2004
2003
Net sales
$19,364 $17,383 --Accounts receivable
2,703
2,475 $2,199
Avg accounts receivable* 2,589 2,337
* [($2,703 +
$2,475)/2]
Accounts Receivable $19,364
=
$2,589
Turnover (2005)
Accounts Receivable= 7.5
Turnover (2005)
71
Number of Days’ Sales in Receivables
Use: To assess the efficiency in
collecting receivables and
in the management of
credit.
Number of Days’
=
Sales in Receivables
Average Accounts receivable
Average daily sales
72
Federal Express Corporation
2005
Net sales
Accounts receivable
Average accounts
receivable
Average daily sales
*
$19,364
2,703
2004
2003
$17,383
--2,475 $2,199
* 2,589 * 2,337
53.1
47.6
[($2,475 + $2,199)/2]
* [($2,703 + $2,475)/2]
Number of Days’ Sales in =
Receivables (2004)
Number of Days’ Sales in =
Receivables (2004)
**
($17,383/365)
$2,337
47.6 **
49.1
73
Federal Express Corporation
2005
Net sales
Accounts receivable
Average accounts
receivable
Average daily sales
*
2004 2003
$19,364 $17,383
2,703
2,475
*
[($2,703+ $2,475)/2]
*
2,589
53.1
**
---
$2,199
2,337
47.6
($19,364/365)
Number of Days’ Sales in
Receivables (2005)
$2,589
=
53.1 **
Number of Days’ Sales in
Receivables (2005)
= 48.8
74
Summary
 Classification of Receivables
 Uncollectible A/R
 Direct Write-Off Method
 Allowance Method
 Notes Receivable