Receivables Chapter 9
Receivables • Monetary Claims • Arise from selling goods and services on credit and lending money • Two major types • Accounts Receivable • Notes Receivable
Accounts Receivable • Arise from sales or service revenues • Should be converted to cash within normal receivable terms
Direct Write-Off Method On August 12, 2000, Cayman Company sold $580 of merchandise on credit to Benson Brothers. On February 1, 2001, Cayman Company determines it cannot collect the $580 from Benson Brothers
Allowance Method The goal of the allowance method is twofold: • To record the expense of extending credit with revenues in the same accounting period, yielding a more accurate income statement. • To report accounts receivable on the balance sheet at the amount you expect to collect from customers.
Estimating Bad Debts Expense Two Methods • Percent of Sales Method • Aging of Accounts Receivable Method
Percent of Sales Method Bad debts expense is computed as follows:
Percent of Sales MethodExample Baxter Company has credit sales of $700,000 in 2004. Baxter estimates 0.5% of credit sales are uncollectible. What is Uncollectible Accounts Expense for 2004?
Aging of Accounts Receivable Method • Year-end Accounts Receivable is broken down into age classifications. • Each age grouping has a different likelihood of being uncollectible. • Compute a separate allowance for each age grouping.
Writing Off a Bad Debt With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts. Assume that on Feb. 1, Baxter Company deems a $580 account receivable from Benson Brothers to be uncollectible.
Recovery of a Bad Debt Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded. Assume that on June 5, Benson Brothers pays the amount owed.
Credit Card Sales Example TechCom has a bank credit card sale of $100 to a customer. The bank charges a processing fee of 4%. The cash is received immediately.
Credit Card and Bankcard Sales How would TechCom record a $100 non-bank credit card sale with a 2% service charge?
Notes Receivable A note is a written promise to pay a specific amount at a specific future date.
Identifying a Note’sMaturity Date • When the period is given in days… • the maturity date is determined by counting the days from the date of issue. • The date the note was issued is omitted. • The maturity date is counted.
If the note is expressed in days, base a year on 360 days. Interest Computation
End-of-Period Adjustments • When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income.
Reporting Receivables • Some companies report a single amount for its current receivables in the body of the balance sheet. • They use a note to the financial statements to give more details.