1. 2 Chapter 8 REPORTING AND ANALYZING RECEIVABLES.

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Chapter 8

REPORTING AND REPORTING AND ANALYZING ANALYZING

RECEIVABLESRECEIVABLES

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Chapter 8Reporting and Analyzing

ReceivablesAfter studying Chapter 8, you should be able to:

Identify the different types of receivables. Explain how accounts receivable are recognized in

the accounts. Describe the methods used to account for bad

debts. Compute the interest on notes receivable. Describe the entries to record the disposition of

notes receivable.

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Amounts due from individuals and other companies-expected to be collected in cash

Three major classes of receivables Accounts Receivable - amounts owed by customers

on account, expected to be collected within 30-60 days

Notes Receivable - claims for which formal instruments of credit are issued

Other Receivables - non-trade receivables, for example, interest receivable and advances to employees

TYPES OF RECEIVABLES11 1

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Accounts Receivable...

Amounts owed by customers on account.

Result from the sale of goods/services. Expected to be collected within 30-60

days. Most significant type of claim held by

company. Often called trade receivables.

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RECOGNIZING ACCOUNTS RECEIVABLE

When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased).

When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased).

Date Account Titles Debit Credit

General Journal

July 1 Accounts Receivable – Polo Company 1,000Sales 1,000

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Date Account Titles Debit Credit

General Journal

RECOGNIZING ACCOUNTS RECEIVABLE

When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited. When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.

When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited (decreased).

When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited (decreased).

July 5 Sales Returns and Allowances 100

Accounts Receivable – Polo Company 100

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Receivables are valued at the net amount expected to be received in cash

Excludes amounts that the company estimates it will not be able to collect (net realizable value)

Credit losses Recorded as Bad Debts Expense Considered a normal and necessary risk of doing

business

ACCOUNTING FOR BAD DEBTS

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2 Methods for Accounting for Uncollectible Accounts

The Direct Write-off Method

The Allowance Method

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Direct Write-Off Method

Bad debt losses are not estimated. No allowance account is used. Accounts are written off when determined

uncollectible as follows: Bad Debts Expense 200

Accounts Receivable--M. E. Doran 200

Not acceptable for financial reporting purposes.

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Allowance method Required when bad debts are deemed to be

material in amount Uncollectible accounts are estimated

At the end of each period

THE ALLOWANCE METHOD

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Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period.

Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period.

THE ALLOWANCE METHOD

Date Account Titles Debit Credit

General Journal

Dec. 31 Bad Debts Expense 12,000 Allowance for Doubtful Accounts 12,000

Presentation of Allowance for Doubtful Accounts

Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

THE ALLOWANCE METHOD

Date Account Titles Debit Credit

General Journal

Mar. 1 Allowance for Doubtful Accounts 500 Accounts Receivable - R. A. Ware 500

General Ledger Balances after Write-off

When there is recovery of an account that has been written off: reverse the entry made to write off the account and...

When there is recovery of an account that has been written off: reverse the entry made to write off the account and...

Recovery of Uncollectible Accounts

Date Account Titles Debit Credit

General Journal

July 1 Accounts Receivable – R. A. Ware 500 Allowance for Doubtful Accounts 500

Record the collection in the usual manner.Record the collection in the usual manner.

Date Account Titles Debit Credit

General Journal

July 1 Cash 500 Accounts Receivable 500

Percentage of Receivables...

Management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.

2% of $600,000(credit sales) = $12,000

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Aging of Accounts Receivable

The analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it

is to be paid.

AGING SCHEDULE

The older the accounts, the less likely to be paid

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PERCENTAGE OF RECEIVABLES BASIS

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.

PERCENTAGE OF RECEIVABLES BASIS

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.

Date Account Titles Debit Credit

General Journal

Dec. 1 Bad Debts Expense 1,700 Allowance for Doubtful Accounts 1,700

Notes Receivable...

Credit which is extended by use of a formal instrument.

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Credit instrument normally requires: payment of interest extends for time periods of 60-90 days or

longer. Give the holder a stronger legal claim than

the other receivables. Can be sold to another party.

Notes Receivable...

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Notes Receivable...

Are often accepted from customers who need to extend payment of an account receivable.

Are often required from high-risk customers.

The basic formula for computing interest on an interest-bearing note is:

The interest rate specified on the note is an annual rate of interest.

FORMULA FOR COMPUTING INTEREST

Face Valueof Note

Annual Interest

Rate

Timein Terms of

One YearInterestX X =

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Illustration 8-11COMPUTATION OF INTEREST

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Review

On 1/1/07, Oscar Co. gave a $10,000, four month, 9% note payable to Dina Inc. At the maturity date, how much will Dina Inc. collect from Oscar Co.?

a. $10,000.b. $10,900.c. $10,225.d. $10,300.

$10,000 x .09 x 120/360

HONOR OF NOTESRECEIVABLE

A note is honored when it is paid in full at its maturity date. A note is honored when it is paid in full at its maturity date.

10,375 10,000 375

HONOR OF NOTESRECEIVABLE

If Wolder Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued.

If Wolder Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued.

300 300

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Companies frequently sell their receivables to another company to shorten their cash-to-cash cycle

Reasons for selling receivables

• Size of receivables, large amounts of cash are tied up

• Receivables may be the only reasonable source of cash

• Billing and collecting are time consuming and costly

ACCELERATING CASH RECEIPTS

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SALE OF RECEIVABLES TO A FACTOR

Hendrendon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold.

Hendrendon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold.

Date Account Titles Debit Credit

General Journal

Cash 588,000Service Charge Expense (2% x $600,000) 12,000 Accounts Receivable 600,000

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