1
10
Receivables
Examples
are
Accounts
and Notes
Receivable
1.
Learning Objectives
Utilize the Direct Method for
Uncollectible Accounts Receivable
2. Utilize the Allowance Method for
Uncollectible Accounts Receivable
3. Compute the Uncollectible Accounts
Receivable Allowance
4. Describe accounting for Notes
Receivable
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
5. Analysis: Compute and explain days’
sales and turnover in accounts
receivable
Revenue
Expenses
Equity
Profit
Debit
Credit
or
Loss
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Overview -Receivables
Receivables -assets expected to be
converted to cash over time.
•Accounts receivable - amounts due
from customer purchases “on
account” in the normal course of
business
•Notes receivable - written
promises to pay including interest.
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Overview -Receivables
Accounts receivable are a primary source
of operating cash flow. To increase
cash flow receivables are often:
•Factored or sold to third parties for
cash (less a factoring charge) to provide
needed cash flow prior to the receivables
scheduled collection.
•Pledged or offered as collateral to third
party providers of business credit (i.e.
banks) to facilitate lines of credit and
loans to the firm.
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Overview -Receivables
A major issue in the study of
accounts receivable is the
accounting problem of
dealing with credit losses due
to uncollectible accounts.
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Overview -Receivables
Two methods are used to deal
with uncollectible* accounts:
•Direct Write Off
•Allowance
•*also described as doubtful
Additional Concepts are needed to
understand the treatment of Receivables
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Materiality Concept
Will the size of the accounting
information misstatement or
omission affect the judgment of
third parties who are relying on
the statements?
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Materiality Concept
Example: A business typically records office
supplies expense in range of $50,000 per year.
The physical count at year end includes a box of
paper clips, for which, there is no available
record of cost. Using one comparable brand, the
cost is $5.25; using a second comparable brand
the cost is $6.25. In a $50,000 budget, the $1 of
uncertainty is not material. Either figure would
be acceptable.
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Conservatism Concept
The desired practice in
accounting of using the least
optimistic estimate when two or
more estimates are equally likely.
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Conservatism Concept
Example: One trade publication estimates
the useful life of fabricated concrete
forms to be 50 pours, while another
estimates 35 pours. The conservatism
concept would encourage use of the 35
pour estimate to determine the useful life
as it is the least optimistic information as
to the life of this material.
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Materiality & Conservatism
Accounting for Accounts Receivable
involves the use of estimates.
When using estimates it is important to
remember these concepts.
Use the least optimistic estimate when
alternatives are equally likely.
Omission of an item in an estimate is
acceptable if it’s omission would not affect
the judgment of third party users of the
financial statements.
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Uncollectible accounts
result in Bad Debt* Expense
An inescapable fact of granting
credit to customers in the course
of business is the hard reality
that some customers will
eventually be unable or unwilling
to pay.
* Also called Uncollectible Account expense
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Objective 10.1: Utilize the
Direct Method for Uncollectible
Accounts Receivable
With the Direct Method, the account is
expensed (written off) only when it is
deemed to be uncollectible.
Example: On January 18, Wilson Excavators
determined that the entire account receivable of
$6,750 owed by customer Oakwood Homes was
not collectible due to a bankruptcy. The journal
entry to record the write off follows. . .
O10.1
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Journal
entry –
Direct
write off
GENERAL JOURNAL
Date
Description
Page 7
Debit
PR
18-Jan ¢Uncollectible Account Expense
520
¢Oakwood Homes, RECEIVABLE
Credit
6,750.00
6,750.00
P/150
SUBSIDIARY LEDGER
Account Nam e: ¢ Oakwook Hom es, RECEIVABLE
Date
2007
Post
Ref.
Item
Acct #: 150.7
BALANCE
Debit
Credit
J7
LEDGER
6,7 50.00
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
1 8-Jan
BALANCE SHEET
Assets
Liabilities
Post
Ref.
Item
Credit
6,7 50.00
Balance Forward
1 8-Jan
Debit
0.00
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
560.00
Balance Forward
J7
6,7 50.00
7 ,310.00
INCOME STATEMENT
Revenue
Uncollectible account expense
is also know as Bad debt
expense.
Expenses
Equity
Profit
Debit
Credit
or
Loss
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When was the $6,750
earned?
The Oakwood Homes receivable was
earned two months earlier in the
previous fiscal year.
Therefore, the Uncollectible account
expense will not occur in the same
fiscal period as the revenue from this
transaction. This violates the Matching
Concept.
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Direct Write Off Method
Because it violates the Matching Concept, the
Direct write off Method is not a generally
accepted accounting principle. It is the method
permitted by the Internal Revenue Service
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Objective 10.2: Utilize the
Allowance method for
Uncollectible Accounts
Receivable
The Allowance
method estimates
Uncollectible accounts
expense to follow the
Matching Concept.
O10.2
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The Allowance account is:
•A contra asset account
•Used to reduce Accounts
Receivable by the estimate of
future uncollectible accounts.
We don’t know which Accounts
Receivable will become uncollectible,
so we use a contra account.
O10.2
©CourseCollege.com
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The Allowance account
BALANCE SHEET
Asset s
100 Cash
130 Supplies
150 Accounts Receivable
155 Allow ance for
Liabilit ies
200 Accounts Payable
Unc ollec tible Ac c ounts
Equit y
300 Ow ner, Capital
310 Ow ner, Draw ing
Accounts Receivable
Allowance for Uncollectible
Accounts
Net realizable value
O10.2
INCOME STATEMENT
Revenue
400 Sales
Expenses
500 Cost of Goods Sold
510 Wages Expense
520 Uncollectible Account
Expense
7
(1)
or
The net
effect or
“weight” on
the balance
sheet is
called the
Pro fit
net
realizable
Lo ss
value of
accounts
receivable.
6
©CourseCollege.com
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Adjusting entry for AR
Allowance
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
Debit
PR
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
520
¢Allowance for Uncollectible Accounts
2,500.00
155
2,500.00
LEDGER
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
Item
Acct #: 1 55
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
0.00
Balance Forward
31 -Dec
J7
2,500.00
2,500.00
LEDGER
BALANCE SHEET
Assets
Liabilities
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
INCOME STATEMENT
Revenue
Expenses
Equity
O10.2
Debit
Date
2007
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
2,500.00
2,500.00
Profit
Credit
or
Loss
©CourseCollege.com
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When is a specific AR
removed because it cannot
be collected?
When the firm receives
information that the specific AR
will not be collected.
It is then written off
O10.2
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Don’t you have
something in your
Allowance account
for my unfortunate
circumstance?
The Dog here just
informed me that he
is bankrupt and can’t
pay his $1000
espresso bill.
O10.2
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Write off using the
Allowance method
GENERAL JOURNAL
PR
Debit
25-Mar ¢Allowance for Uncollectible Accounts
155
1000.00
¢Mr. Dog -RECEIVABLE
P/150
Date
Notice the
Allowance
is being
used up
with the
Write off.
Page 9
Description
Credit
1,000.00
LEDGER
Account Nam e: ¢ Mr. Dog, RECEIVABLE
Date
2007
Item
Post
Ref.
Acct #: 150.7
BALANCE
Debit
J9
LEDGER
1,000.00
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
O10.2
Item
Credit
1,000.00
Balance Forward
25-Mar
Debit
Credit
Post
Ref.
0.00
Acct #: 1 55
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
31 -Dec
J7
25-Mar
J9
2,500.00
1,000.00
2,500.00
1,500.00
©CourseCollege.com
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Write offs using the Allowance
method do not involve an expense
GENERAL JOURNAL
PR
Debit
25-Mar ¢Allowance for Uncollectible Accounts
155
1000.00
¢Mr. Dog -RECEIVABLE
P/150
Date
The
expense
was
recorded
when the
allowance
was
adjusted
Page 9
Description
Credit
1,000.00
LEDGER
Account Nam e: ¢ Mr. Dog, RECEIVABLE
Date
2007
Item
Post
Ref.
Acct #: 150.7
BALANCE
Debit
J9
LEDGER
1,000.00
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
O10.2
Item
Credit
1,000.00
Balance Forward
25-Mar
Debit
Credit
Post
Ref.
0.00
Acct #: 1 55
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
31 -Dec
J7
25-Mar
J9
2,500.00
1,000.00
2,500.00
1,500.00
©CourseCollege.com
GENERAL JOURNAL
Date
Description
31-Dec
PR
Debit
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
Adjust –
Write
off
¢Allowance for Uncollectible Accounts
520
2,500.00
155
2,500.00
The specific accounts which
will eventually be uncollectible
are not know when the
estimate is made. It is a best
guess.
GENERAL JOURNAL
Page 9
PR
Debit
25-Mar ¢Allowance for Uncollectible Accounts
155
1000.00
¢Mr. Dog -RECEIVABLE
P/150
Date
Description
BALANCE SHEET
Assets
24
Page 7
Liabilities
Credit
1,000.00
INCOME STATEMENT
Revenue
Expenses
Equity
O10.2
Profit
Debit
Credit
or
Loss
©CourseCollege.com
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Objective 10.3: Compute
the Uncollectible Accounts
Receivable Allowance
BALANCE SHEET
Asset s
100 Cash
130 Supplies
150 Accounts Receivable
155 Allow ance for
Liabilit ies
200 Accounts Payable
Unc ollec tible Ac c ounts
Equit y
300 Ow ner, Capital
310 Ow ner, Draw ing
INCOME STATEMENT
Revenue
400 Sales
Expenses
500 Cost of Goods Sold
510 Wages Expense
520 Uncollectible Account
Expense
Pro fit
or
Lo ss
O10.3
©CourseCollege.com
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How is Uncollectible account
expense estimated?
How is the amount of the
Allowance estimated?
• Using the firm’s historical
expense information
• Two approaches are used. . .
O10.3
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1. Balance Sheet
Focus
BALANCE SHEET
Asset s
100 Cash
130 Supplies
150 Accounts Receivable
155 Allow ance for
Liabilit ies
200 Accounts Payable
Unc ollec tible Ac c ounts
Equit y
300 Ow ner, Capital
310 Ow nr, Draw ing
At the end of the fiscal
period, both approaches
estimate and record the
expense for uncollectible
accounts.
O10.3
2. Income Statement
Focus
INCOME STATEMENT
Revenue
400 Sales
Expenses
500 Cost of Goods Sold
510 Wages Expense
520 Uncollectible Account
Expense
Two
Approaches
©CourseCollege.com
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Two Approaches
1
Balance Sheet Focus –What
portion of the existing Accounts
Receivable are estimated to be
uncollectible?
2
Income Statement Focus-What
portion of Sales on account are
estimated to be uncollectible?
.
.
O10.3
©CourseCollege.com
Which approach should be
used?
1
Balance Sheet Focus –net
realizable value is the greater
concern
2
Income Statement Focus-matching
concept is the greater concern
.
.
O10.3
29
©CourseCollege.com
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% of Accounts Receivable
Firms using the % of Accounts
Receivable believe that a percentage of
AR is the best estimate of uncollectible
account expense.
Based on historical uncollectible account
expense, the firm determines the
percentage of end of fiscal period
Accounts Receivable that are expected
to result in uncollectible account (bad
debt) expense.
O10.3
©CourseCollege.com
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% of Accounts Receivable
(example)
Marsh Cabinets estimates that 2.5% of
the end of period AR result in
uncollectible account expense. AR at
year end total $88,000.
$88,000 X .025 = $2,200
Marsh will select the adjusting entry for
Uncollectible account expense that results
in the net realizable value of AR equal to
$88,000 less 2.5% as follows. . .
O10.3
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% of Accounts Receivable
(example)
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
Debit
PR
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
520
¢Allowance for Uncollectible Accounts
2,200.00
155
2,200.00
LEDGER
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
Item
Acct #: 1 55
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
0.00
Balance Forward
31 -Dec
J7
2,200.00
2,200.00
LEDGER
BALANCE SHEET
Assets
Liabilities
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
INCOME STATEMENT
Revenue
Expenses
Equity
O10.3
Debit
Date
2007
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
2,200.00
2,200.00
Profit
Credit
or
Loss
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% of Accounts Receivable
(example)
GENERAL JOURNAL
Date
Description
31-Dec
Debit
PR
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
What if
there had
been a
balance in
the
Allowance
account?
Page 7
520
¢Allowance for Uncollectible Accounts
2,200.00
155
2,200.00
LEDGER
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
Item
Acct #: 1 55
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
0.00
Balance Forward
31 -Dec
J7
2,200.00
2,200.00
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
2,200.00
2,200.00
©CourseCollege.com
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% of Accounts Receivable
(example)
With the %
GENERAL JOURNAL
Page 7
of AR
method the Date
Debit
Credit
Description
PR
balance (if
31-Dec
ADJUSTING ENTRIES
any) in the
¢Uncollectible Account Expense
520
Allowance
account
¢Allowance for Uncollectible Accounts
155
must be
LEDGER
considered
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Acct #: 1 55
when
BALANCE
calculating
Post
Debit
Credit
Date
Item
Ref.
Debit
Credit
the
400.00
adjusting 2007 Balance Forward
31 -Dec
J7
entry .
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
©CourseCollege.com
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% of Accounts Receivable
(example)
GENERAL JOURNAL
Date
Description
Page 7
Debit
PR
Credit
The
31-Dec
ADJUSTING ENTRIES
adjusting
¢Uncollectible Account Expense
520
1,800.00
entry is
¢Allowance for Uncollectible Accounts
155
1,800.00
calculated
LEDGER
to force the
ending
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Acct #: 1 55
balance to
BALANCE
Post
equal the %
Debit
Credit
Date
Item
Ref.
Debit
Credit
of AR
2007
400.00
Balance Forward
desired.
31 -Dec
J7
1,800.00
2,200.00
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
1,800.00
1,800.00
©CourseCollege.com
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% of Accounts Receivable
(example)
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
Debit
PR
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
520
1,800.00
This would
¢Allowance for Uncollectible Accounts
155
result in a
LEDGER
different
amount of Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Uncollectible
Post
account Date
Item
Ref.
Debit
Credit
expense. 2007 Balance Forward
31 -Dec
J7
1,800.00
Acct #: 1 55
1,800.00
BALANCE
Debit
Credit
400.00
2,200.00
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
1,800.00
1,800.00
©CourseCollege.com
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Aging Accounts Receivable
A more accurate % of AR approach is to employ an
aging analysis of AR.
Aging analysis separates AR into groups according
to their due date.
Typically, the older the group of AR, the higher the
% expected to become uncollectible.
Using historical experience, the firm applies
different percentages to the aging groups as
follows. . .
O10.3
©CourseCollege.com
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Aging Accounts Receivable
Milton Art Supply
AR Aging 12/31/07
Day s past due
Current
0 to 30 days
31 to 60 days
61 to 90 days
91 days and over
AR Balance
Percent
Amount
Uncollect ible Uncollect ible
67,500
34,500
19,300
5,600
11,200
138,100
0.8%
2.1%
6.7%
17.0%
34.2%
540
725
1,293
952
3,830
7,340
After adjusting entry, this should be
the balance in the Allowance account
O10.3
©CourseCollege.com
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Net value of AR
BALANCE SHEET
Asset s
100 Cash
130 Supplies
150 Accounts Receivable
155 Allow ance for
Liabilit ies
200 Accounts Payable
Unc ollec tible Ac c ounts
Equit y
300 Ow ner, Capital
310 Ow ner, Draw ing
Accounts Receivable
Allowance for Uncollectible
Accounts
Net realizable value
O10.3
INCOME STATEMENT
Revenue
400 Sales
Expenses
500 Cost of Goods Sold
510 Wages Expense
520 Uncollectible Account
Expense
138,100
Pro fit
or
Lo ss
(7,340)
130,760
©CourseCollege.com
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% of Sales
(on account)
Firms using the % of Sales believe that
some percentage of credit Sales is the
best estimate of uncollectible account
expense.
Based on historical uncollectible account
expense, the firm determines the
percentage of total credit sales that are
expected to result in uncollectible
account (bad debt) expense.
O10.3
©CourseCollege.com
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% of Sales
(example)
Lie Photography estimates that 1.2% of
sales on account have resulted in
uncollectible account expense. For the
year just ended, total sales on account
were $365,000.
$365,000 X .012 = $4,380
Lie will expense 1.2% of sales or $4,380
with an adjusting entry at year end as
follows. . .
O10.3
©CourseCollege.com
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% of Sales
(example)
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
Debit
PR
Credit
ADJUSTING ENTRIES
¢Uncollectible Account Expense
520
¢Allowance for Uncollectible Accounts
4,380.00
155
4,380.00
LEDGER
Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT
Date
2007
Item
Acct #: 1 55
BALANCE
Post
Ref.
Debit
Credit
Debit
Credit
150.00
Balance Forward
31 -Dec
J7
4,380.00
4,530.00
LEDGER
BALANCE SHEET
Assets
Liabilities
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
INCOME STATEMENT
Revenue
Expenses
Equity
O10.3
Debit
Date
2007
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
4,380.00
4,380.00
Profit
Credit
or
Loss
©CourseCollege.com
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% of Sales
(example)
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
PR
Debit
Credit
ADJUSTING ENTRIES
Any balance
¢Uncollectible Account Expense
520
4,380.00
remaining in
¢Allowance for Uncollectible Accounts
155
4,380.00
the
LEDGER
Allowance
account is Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 1 55
ignored when
BALANCE
Post
using the % Date
Debit
Credit
Item
Ref.
Debit
Credit
of Sales 2007 Balance Forward
150.00
method. 31 -Dec
J7
4,380.00
4,530.00
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
4,380.00
4,380.00
©CourseCollege.com
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% of Sales
(example)
Over several
GENERAL JOURNAL
Page 7
fiscal
Debit
Credit
Description
PR
periods, aDate
build up or31-Dec
ADJUSTING ENTRIES
shortage in
¢Uncollectible Account Expense
520
4,380.00
the
¢Allowance for Uncollectible Accounts
155
4,380.00
Allowance
LEDGER
account
should be Account Nam e: ¢ ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 1 55
addressed
BALANCE
Post
by reviewingDate
Debit
Credit
Item
Ref.
Debit
Credit
the estimate2007 Balance Forward
150.00
used.
31 -Dec
J7
4,380.00
4,530.00
LEDGER
Account Nam e: ¢ UNCOLLECT IBLE ACCOUNT EXPENSE
Date
2007
O10.3
31 -Dec
Item
Post
Ref.
Acct #: 520
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
4,380.00
4,380.00
©CourseCollege.com
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Objective 10.4: Describe
accounting for Notes
Receivable
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
O10.4
Debit
Profit
Credit
or
Loss
©CourseCollege.com
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Notes Receivable
Promissory Note
$5,000
Amount
Date
May 14, 2007
Sixty days after date
I
promise to pay to the order of
Western Supply
Seattle, WA
Five Thousand and no/100 ————————————-Dollars
For value received with interest at the annual rate of 10%
John Kowalsky
.
Kowalsky Construction
O10.4
The Maker is the entity
who
promises to pay.
©CourseCollege.com
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Examples
GENERAL JOURNAL
Financing a
Sale
Date
Description
170
Date
Description
Date
170
Description
Credit
5,000.00
5,000.00
Page
Debit
PR
28-Jul ¢Notes Receivable
170
¢Customer A, RECEIVABLE
Date
2007
Item
5,000.00
P/150
Post
Ref.
Acct #: 150.3
BALANCE
Debit
Credit
J4
INCOME STATEMENT
5,000.00
Credit
0.00
LEDGER
Revenue
Account Nam e: ¢ NOT ES RECEIVABLE
Date
2007
Equity
Profit
O10.4
Debit
5,000.00
Balance Forward
Expenses
Credit
Credit
5,000.00
Account Nam e: ¢ Custom er A, RECEIVABLE
28-Jul
Debit
4
SUBSIDIARY LEDGER
Notes
Receivable
Liabilities
Debit
100
GENERAL JOURNAL
¢Cash
Conversion of
Accounts
Receivable
5,000.00
Page
4
PR
28-Jul ¢Notes Receivable
Credit
5,000.00
¢Sales
GENERAL JOURNAL400
Lending Cash
directly
Assets
Debit
PR
28-Jul ¢Notes Receivable
BALANCE SHEET
Page 4
28-Jul
Item
Post
Ref.
Acct #: 170
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J4
5,000.00
5,000.00
or
Loss
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Notes Receivable
Principal
amount
X
Annual
Interest
rate
X
Time
Period
in years
=
Interest
Example:
Principal = $50,000; Interest (annual) 8%; Maturity
180 days;
The note was received Feb. 1; end of fiscal period
Dec. 31, no adjusting entry is required.
$50,000 x .08 x (180/360) = $2000
O10.4
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GENERAL JOURNAL
At
Maturity
Date
Description
Debit
PR
1-Jul ¢Cash
100
52,000.00
170
50,000.00
¢Interest Income
415
2,000.00
LEDGER
Acct #: 100
Post
Ref.
Item
BALANCE
Debit
Debit
Credit
1 -Aug
J7
52,000.00
LEDGER
60,600.00
Account Nam e: ¢ INTEREST INCOME
Post
Ref.
Item
Assets
Liabilities
Debit
Debit
Debit
Credit
2,000.00
LEDGER
Account Nam e: ¢ NOT ES RECEIVABLE
Revenue
Date
2007
Item
Credit
500.00
J7
1 -Aug
O10.4
BALANCE
Post
Ref.
2,500.00
Acct #: 170
INCOME STATEMENT
Expenses
Equity
Acct #: 415
Balance Forward
1 -Aug
BALANCE SHEET
Credit
8,600.00
Balance Forward
Date
2007
Credit
¢Notes Receivable
Remember that
Interest Income is
usually reported
on the Nam e: ¢ CASH
Account
Income Statement with
“Other (Income)/
Expense”
Date
2007
Page 7
BALANCE
Debit
Credit
Debit
Credit
50,000.00
Balance Forward
J7
50,000.00
0.00
Profit
Credit
or
Loss
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50
Notes Receivable
Principal
amount
X
Annual
Interest
rate
X
Time
Period
in years
=
Interest
Example:
Principal = $24,000; Interest (annual) 10%;
Maturity 90 days;
The note was received Nov. 1; end of fiscal period
Dec. 31 adjustment entry is required.
$24,000 x .10 x (60/360) = $400
O10.4
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51
Adjusting Entry
GENERAL JOURNAL
Date
Description
31-Dec
Page 7
PR
Debit
Credit
ADJUSTING ENTRIES
¢Interest Receivable
160
¢Interest Income
415
400.00
400.00
LEDGER
Account Nam e: ¢ INT EREST RECEIVABLE
Date
2007
Post
Ref.
Item
Acct #: 160
BALANCE
Debit
Credit
Debit
0.00
Balance Forward
31 -Dec
Credit
J7
400.00
400.00
LEDGER
Account Nam e: ¢ INTEREST INCOME
BALANCE SHEET
Assets
Liabilities
Equity
O10.4
Debit
INCOME STATEMENT
Revenue
Date
Expenses2007
31 -Dec
Item
Post
Ref.
Acct #: 415
BALANCE
Debit
Credit
Debit
Credit
234.50
Balance Forward
J7
400.00
634.50
Profit
Credit
or
Loss
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GENERAL JOURNAL
At
Maturity
Date
Description
Page 7
Debit
PR
1-Feb ¢Cash
100
¢Interest Receivable
160
400.00
¢Interest Income
415
200.00
170
24,000.00
¢Note Receivable
Date
2008
LEDGER
Acct #: 100
BALANCE
Post
Ref.
Item
Debit
Debit
Credit
1 -Feb
LEDGER
24,600.00
J7
53,100.00
Account Nam e: ¢ INT EREST RECEIVABLE
Item
Acct #: 160
BALANCE
Post
Ref.
Debit
Credit
LEDGER
J7
400.00
Account Nam e: ¢ NOT ES RECEIVABLE
Date
2008
Item
Post
Ref.
0.00
BALANCE
Debit
Debit
Credit
LEDGER 24,000.00
J7
1 -Feb
O10.4
Item
Credit
24,000.00
Account Nam e: ¢ INTEREST INCOME
Date
2008
Credit
Acct #: 170
Balance Forward
1 -Feb
Debit
400.00
Balance Forward
1 -Feb
Credit
28,500.00
Balance Forward
Date
2008
Credit
24,600.00
Account Nam e: ¢ CASH
The receipt of principal
and interest at maturity
requires this journal
entry that recognizes the
new interest income for
the current fiscal period.
52
Post
Ref.
0.00
Acct #: 415
BALANCE
Debit
Credit
Debit
Credit
0.00
Balance Forward
J7
200.00
200.00
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Objective 10.5: Analysis:
Compute and explain
days’ sales and turnover
in accounts receivable
O10.5
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54
Days’ Sales Uncollected
The days’ sales uncollected answers the following
question:
On average, how many days will it take to collect the
current AR total?
The AR balance is the
end of year total.
Sales is for the year.
AR
Sales
O10.5
X 365
Days’ Sales
Uncollected
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AR Turnover
The AR turnover ratio answers the following question:
How many times did the firm sell its’ average Accounts
Receivable.
Average AR is often
calculated as:
(Beg AR +End AR)/2
Sales
AR
Turnover
Average
Accounts
Receivable
O6.4
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Example
Assets
Cash
Accounts receivable
Alllow ance for Uncol.
Accounts
Inventory
Total assets
Balance Sheet -April's Gifts
As of 12/31 2007 and 2008
2007
9,000
75,000
2008
10,000
81,000
Liabilities
Accounts Payable
Inv. Loan
2007
45,000
18,000
2008
41,500
14,400
(2,500)
(2,600)
Total liabilities
63,000
55,900
169,500
196,500
151,000
232,500
164,000
252,400
Equity
Ow ner, Capital
Income Statement
For the year ended 12/31/08
Sales
Cost of Goods Sold
Wages expense
Uncollectible account
expense
Miscellaneous expense
Net Profit
654,000
490,500
61,000
2,000
73,500
27,000
Average AR
(net AR for years 2007 +2008) / 2
AR t urnover
(Sales / Avg. AR)
Days' Sales Uncollect ed
(365 x AR / Sales)
75,450
8.7
X
43.8 days
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End Unit 10
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