ACCOUNTING
PRINCIPLES
SIXTH CANADIAN EDITION
Chapter 8
Accounting for Receivables
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
Accounting for Receivables
• Accounts receivable
– Recognition and valuation
• Notes receivable
– Recognition and disposition
• Statement presentation and
management of receivables
– Presentation
– Analysis
– Accelerating cash receipts from
receivables
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CHAPTER 8:
Accounting for Receivables
STUDY OBJECTIVES:
1. Record accounts receivable transactions.
2. Calculate the net realizable value of accounts
receivable and account for bad debts.
3. Account for notes receivable.
4. Demonstrate the presentation, analysis and
management of receivables.
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Types of Receivables
• Amounts due from individuals and
other companies
• Accounts receivable:
– Amounts owed by customers on account
– Expected to be collected within 30 days
• Notes receivable:
– Supported by formal instruments of
credit (a written note)
– For periods of 30 days or longer
– Interest bearing
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Recognizing Accounts Receivable
• A receivable is recorded when:
– Services are provided
– Merchandise is sold on account
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Subsidiary Accounts
Receivable Ledger
• Used to track individual customer
accounts
• Each entry is effectively posted twice:
– To the subsidiary ledger
– To the general ledger in summary form
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Interest Revenue
• If a customer does not pay in full within a
specified period, financing charges (interest) is
added to the balance due
– Recognized as interest revenue
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Nonbank Credit Card Sales
• Nonbank credit card sales are treated as sales
on account
– Unlike bank credit card sales - treated as cash sales
– Receipt of cash from nonbank credit cards is
recorded as follows
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CHAPTER 8:
Accounting for Receivables
STUDY OBJECTIVES:
1. Record accounts receivable transactions.
2. Calculate the net realizable value of accounts
receivable and account for bad debts.
3. Account for notes receivable.
4. Demonstrate the presentation, analysis and
management of receivables.
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9
Valuing Accounts Receivable
• Some receivables will become uncollectible
– Not reported as assets if no future benefit
– Net realizable value: the collectible amount
• Receivables are written down to their
collectible amount
– By recording bad debt expense
– In the same period as related revenues are
recorded
• Key issue is to estimate the amount that
will not be collected
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The Allowance Method
Three features of allowance method:
1. Amount of uncollectible receivables is
estimated and recorded at end of period
2. Actual uncollectibles are written off against
the allowance when it is determined the
specific account is uncollectible
3. If an account previously written off is
recovered the write off is reversed and the
collection recorded
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Allowance for Doubtful
Accounts
• Deducted from Accounts Receivable in the
current assets section of balance sheet
• Net realizable value
= Accounts Receivable less Allowance for
Doubtful Accounts
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Estimating the Allowance:
Percentage Receivables Approach
• Calculates the percentage of receivables
that are estimated to be uncollectible
– Based on past experience and credit policy
• Can be applied to total receivables balance
or amounts grouped by age
– Requires an aging schedule to be prepared
• Better estimate of net realizable value
• Also called the balance sheet method
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1. Recording Estimated
Uncollectibles
• Estimated amount of uncollectible
accounts is:
– Debited to an expense account – bad debts
expense
– Credited to a contra asset account –
allowance for doubtful accounts
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2. Recording Write-Off of
Uncollectible Accounts
• Amount written-off is debited to the allowance
account
• Bad debt expense is not increased
– Expense previously recognized when allowance
initially recorded
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3. Recovery of an Uncollectible
Account
• If cash is collected from a customer after the
account has been written off:
1. Reverse write-off entry to restore customer’s account
2. Record collection of the account receivable in the
usual way
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CHAPTER 8:
Accounting for Receivables
STUDY OBJECTIVES:
1. Record accounts receivable transactions.
2. Calculate the net realizable value of accounts
receivable and account for bad debts.
3. Account for notes receivable.
4. Demonstrate the presentation, analysis and
management of receivables.
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17
Notes Receivable
• Credit may be granted in exchange for a
promissory note:
– A formal credit instrument
– A written promise to pay a specified amount of
money on demand or at a definite time
• The party making the promise is the maker
• The party to whom payment is made is
called the payee
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Recognizing Notes Receivable
• If note is received to settle an outstanding
account receivable:
• If received for cash, credit is to Cash
• Notes are valued at net realizable value
– Similar process to determine bad debt
expense and allowance as for accounts
receivable
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Recording Interest
• Formula for calculating interest:
• An annual rate of interest
• Separate interest receivable account is used
(value of note is not altered)
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Disposing of Notes Receivable
• A note is honoured when paid in full on its
maturity date
– Amount due is principal + interest
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Disposing of Notes Receivable 2
• A note is dishonoured if not paid in full at
maturity
– Note is no longer negotiable
– Payee still has a valid claim against maker
– Balance is transferred to Accounts Receivable
in hopes of collection
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CHAPTER 8:
Accounting for Receivables
STUDY OBJECTIVES:
1. Record accounts receivable transactions.
2. Calculate the net realizable value of accounts
receivable and account for bad debts.
3. Account for notes receivable.
4. Demonstrate the presentation, analysis and
management of receivables.
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23
Statement Presentation
• Each major type of receivable is identified
on the balance sheet or in the notes
• Generally reported separately in the current
or noncurrent sections of the balance sheet
• Disclose the net amount of receivables
– Gross amount and the allowance for doubtful
accounts must also be disclosed, either on
balance sheet or in notes
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Analysis of Receivables
• Management monitors relationship
between sales, receivables and cash
– Receivables should increase with sales
– Unusual increase could signal trouble
• Receivables ratios:
– Used to help determine if management
of receivables is helping or hurting
liquidity
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Analysis of Receivables 2
Receivables turnover ratio:
= Net Credit Sales ÷ Average Receivables
– Measures the number of times that
receivables are collected in a period
– Higher the number, the more liquid are
receivables
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Analysis of Receivables 3
Collection period:
= Days in Year ÷ Receivables Turnover Ratio
– Calculates the average number of days that
accounts receivable are outstanding
Operating Cycle:
= Days Sales in Inventory + Collection Period
– Calculates the number of days to complete the
operating cycle
• Purchase of inventory through collection of cash
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Accelerating Cash From
Receivables
• To shorten the cash-to-cash operating
cycle
• Loans secured by receivables:
– Borrow from bank using receivables as
collateral
• Sale of receivables:
– Factoring: sell receivables to a finance
company or bank (called a factor)
– Securitization: sell receivables to a trust
held by many investors
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Copyright
Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights
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assume no responsibility for errors, omissions, or damages
caused by the use of these files or programs or from the use
of the information contained herein.
Prepared by:
A. Davis, MSc, BComm, CA, CFE
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