slide1 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
ACCOUNTING FOR RECEIVABLES PowerPoint Presentation
Download Presentation
ACCOUNTING FOR RECEIVABLES

Loading in 2 Seconds...

play fullscreen
1 / 40

ACCOUNTING FOR RECEIVABLES - PowerPoint PPT Presentation


  • 134 Views
  • Uploaded on

CHAPTER. 9. ACCOUNTING FOR RECEIVABLES. The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash. Three major classes of receivables are: i. Accounts Receivable (due 30 days)

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'ACCOUNTING FOR RECEIVABLES' - dom


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

CHAPTER

9

ACCOUNTING FOR RECEIVABLES

slide2
The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.

Three major classes of receivables are:

i. Accounts Receivable (due 30 days)

ii. Notes Receivable (due 30-90 days)

iii. Other Receivables

RECEIVABLES

slide3
The three primary accounting problems associated with accounts receivable are:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

3. Disposing of accounts receivable.

ACCOUNTS RECEIVABLE

slide4

Date

Particulars

Debit

Credit

July 1

1. RECOGNIZING ACCOUNTS RECEIVABLE

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

Accounts Receivable – Adorable Junior 1,000

Sales 1,000

slide5

Date

Particulars

Debit

Credit

July 5

1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)

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

Sales Returns and Allowances 100

Accounts Receivable 100

slide6

Date

Particulars

Debit

Credit

July 31

Cash ($1,000 – $100)

900

  • Accounts Receivable

900

1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)

When a business collects cash from a customer for merchandise previously sold on credit, Cashis debited and Accounts Receivable is credited.

slide7

Date

Particulars

Debit

Credit

July 31

Accounts Receivable (18% or 1.5% per month on $900)

13.50

  • Interest Revenue

13.50

1. RECOGNIZING ACCOUNTS RECEIVABLE (cont.)

When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenueis credited.

slide8
To ensure that receivables are not overstated, they are stated at their net realizable value.

Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

2. VALUING ACCOUNTS RECEIVABLE

slide9

2. VALUING

ACCOUNTS RECEIVABLE (cont.)

  • Two methods of accounting for uncollectible accounts are:

1. Allowance method

2. Direct write-off method

slide10
Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense.

No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet.

DIRECT WRITE-OFF METHOD

slide11

Why is this a selling operating expense?

Date

Particulars

Debit

Credit

Jan. 12

Bad Debt Expense

200

  • Accounts Receivable – E. Schaefer

200

DIRECT WRITE-OFF METHOD

Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.

slide12
The allowance method is required when bad debts are deemed to be material in amount.

Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred.

Why?

THE ALLOWANCE METHOD

(2 Steps)

Achtung !

slide13

Date

Particulars

Debit

Credit

Dec. 31

Bad Debts Expense

24,000

  • Allowance for Doubtful Accounts

24,000

THE ALLOWANCE METHOD

Step 1

Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period.

slide14

ADORABLE JUNIOR GARMET

Balance Sheet (partial)

Current assets

Cash $ 14,800

Accounts receivable $200,000

Less: Allowance for doubtful accounts 24,000 176,000

Why not just show the Net Realizable Value, and omit the rest?

Net Realizable Value

slide15

Date

Particulars

Debit

Credit

Mar. 1

Allowance for Doubtful Accounts

500

  • Accounts Receivable - Nadeau

500

THE ALLOWANCE METHOD

Step 2

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

slide16

Date

Date

Particulars

Particulars

Debit

Debit

Credit

Credit

July 1

July 1

THE ALLOWANCE METHOD

  • When there is recovery of an account that has been written off:
    • Reverse the entry made to write off the account

Accounts Receivable – Nadeau 500

Allowance for Doubtful Accounts 500

  • Record the collection in the usual manner.

Cash 500

Accounts Receivable 500

slide17
Companies use either of two methods in the estimation of uncollectible accounts:

Percentage of sales

Percentage of aged receivables

Both bases are GAAP; the choice is a management decision.

BASES USED FOR THE ALLOWANCE METHOD

Achtung !

slide18
In the percentage of sales basis, management establishes what amount of net CREDIT sales are expected to be uncollectible (usually from past experience).

Bad Debt Expense is then determined by applying the percentage to the sales base of the current period. The TOTAL amount is charged to Bad Debt. Observe…

Date

Particulars

Debit

Credit

Dec. 31

A. PERCENTAGE OF SALES BASIS

  • This basis better matches expenses with revenues.

Bad Debt Expense 3,000

Allowance for Doubtful Accounts 3,000

slide19
Under this method, management estimates what the TOTAL value of bad debt currently is by applying a percentage to the actual, existing accounts receivable balances at the end of the period.

This percentage can be applied to

The total receivable balance, or

To accounts receivable balances grouped by age. (see pg 429)

B. PERCENTAGE OF AGED RECEIVABLES BASIS

slide20

B. PERCENTAGE OF AGED RECEIVABLES BASIS (cont.)

  • The amount of the adjusting entry is the difference between the required balance in the allowance account, and the current balance.
  • This basis produces the better estimate of net realizable value of receivables. Observe…

Desired Balance

slide21

Date

Particulars

Debit

Credit

Dec. 31

B. PERCENTAGE OF AGED RECEIVABLES BASIS (cont.)

  • So, if the balance in the Allowance account is already $2,200, then the adjusting entry to bring the Allowance up to the present estimated of Net Realizable Receivables is…

Bad Debt Expense ($3,245 - $2,200) 1,045

Allowance for Doubtful Accounts 1,045

slide22

Do the following starting on page 445:

BE9-1 to 6

E9-2

E9-3

P9-2A

P9-3A

slide23
To accelerate the receipt of cash from receivables, owners frequently:

1. sell to a factor, such as a finance company or a bank, and

2. make credit card sales.

3. DISPOSING OF ACCOUNTS RECEIVABLE

slide24
A factor buys receivables from businesses for a fee and collects the payments directly from customers.

Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit.

Retailers can receive cash more quickly from the credit card issuer.

3. DISPOSING OF ACCOUNTS RECEIVABLE (cont.)

slide25
Three parties are involved when credit cards are used in making retail sales:

1. the credit card issuer,

2. the retailer, and

3. the customer.

The retailer pays the credit card issuer a percentage fee of the invoice price for its services.

CREDIT CARD SALES

slide26
Sales resulting from the use of VISAand MasterCard are considered cash sales by the retailer.

These cards are issued by banks.

Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.

BANK CARD SALES

slide27

What other account does this resemble?

July 31

Date

Particulars

Debit

Credit

BANK CARD SALES

  • We purchase a CDs for our restaurant from Karen Kerr Music Co. for $1,000 using our Royal Bank VISA card.
  • The service fee that the Royal charges is 3.5 percent.

Cash 965

Credit Card Expense ($1,000 x 3.5%) 35

Sales 1,000

slide28
A promissory noteis a written promise to pay a specified amount of money on demandor at a definite time.

The party making the promise is the maker.

The party to whom payment is made is called the payee.

NOTES RECEIVABLE

slide29
Interest rate

The cost of borrowing others’ money. It is an expense, not the repayment of debt

Face Value

The price of a note or bond, written on the actual contract (note)

Term

The length of the note or bond before it is due

Maturity

When the note/bond’s face value is due, along with any outstanding interest

IMPORTANT TERMS

slide30
Interest is always calculated as follows:

IMPORTANT TERMS

Interest

Expense

Face

Value

Interest

Rate

=

X

slide31
We now will look at the following three procedures for dealing with notes:

Acquisition

Adjustment/valuation

Disposal/termination

Note: these three steps are similar to many things we will look at this semester. Best to look for trends and processes.

NOTES RECEIVABLE

slide32

Date

Particulars

Debit

Credit

May 1

Notes Receivable

1,000

  • Accounts Receivable – Brent Company

1,000

RECOGNIZING NOTES RECEIVABLE

Acquisition

Wilma Company receives a $1,000, 6% promissory note, due in two months (July 1) from Brent Company to settle an open account.

slide33
Like accounts receivable, short-term notes receivable are reported at their net realizable value.

The notes receivable allowance account is Allowance for Doubtful Notes.

VALUING NOTES RECEIVABLE

slide34

Date

Particulars

Debit

Credit

May 31

Interest Receivable

5

  • Interest Revenue

5

VALUING NOTES RECEIVABLE

Adjustment/Valuation

  • If Wilma company adjusts monthly, the journal entry will look like this:
  • If they do not, not entry will be recorded until the note matures and pays interest.
slide35

Date

Particulars

Debit

Credit

May 31

Cash

1,010

  • Interest Receivable
  • Interest Revenue
  • Notes Receivable

5

5

1,000

VALUING NOTES RECEIVABLE

Disposal/Termination

  • If Wilma company adjusts monthly, the journal entry will look like this:
slide36

Date

Particulars

Debit

Credit

May 31

Cash

1,010

  • Interest Receivable
  • Notes Receivable

10

1,000

VALUING NOTES RECEIVABLE

Disposal/Termination

  • If Wilma company does NOT adjust monthly, the journal entry will look like this:
slide37

Date

Particulars

Debit

Credit

Sept. 30

Accounts Receivabl

1,010

  • Notes Receivable

1,000

  • Interest Revenue

10

DISHONOUR OF NOTES RECEIVABLE

  • A dishonoured note is a note that is not paid in full at maturity.
  • A dishonoured note receivable is no longer negotiable.
  • Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable.
slide38

BALANCE SHEET PRESENTATION OF RECEIVABLES

  • Both the gross amount of receivables and the allowance for doubtful accounts should be reported.
  • Why?
slide39

USING THE INFORMATION IN THE FINANCIAL STATEMENTS

  • Financial ratios are calculated to evaluate the short-term liquidity of a company.
  • Recall these ratios:

1. current ratio,

2. acid test (quick) ratio,

3. receivables turnover, and the

4. A/R collection period (in days).