This article explores the intricacies of receivables, focusing on how businesses extend credit to customers and the realities of uncollectible accounts. It discusses the benefits of notes receivable over standard accounts receivable, including interest earnings, legal claims, and liquidity options like factoring and discounting. Additionally, the article explains how to calculate interest on receivables and determine due dates using various methods. These insights are crucial for effective financial management and ensuring that businesses optimize revenue collection.
01 / 52Understanding Receivables: Notes, Interest Revenue, and Management Strategies
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Understanding Receivables: Notes, Interest Revenue, and Management Strategies
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Receivables Premise: When you extend credit to customers…
Receivables Premise: When you extend credit to customers… you know some customers won’t pay.
Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions:
Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I. Notes Receivable and Interest
Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I. Notes Receivable and Interest II. Uncollectible Accounts
Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I. Notes Receivable and Interest II. Uncollectible Accounts Lecture
Receivables Premise: When you extend credit to customers… you know some customers won’t pay. Solutions: I. Notes Receivable and Interest II. Uncollectible Accounts Today
Why Notes instead of Accounts Receivable? • charge (earn) interest • stronger legal claim • more liquid -- may be converted to cash • selling A/R called “factoring” • selling Notes Receivable called “discounting”
Calculating Interest P x R x T • rate is an annual rate • time expressed as a portion of year • government uses 365 • many banks use 360 • use 360 in homework / class
Short-cut “6% - 60 day” Method $844. x 6% x 60 / 360 = ??? $844. = $8.44 You try . . . 6% for 30 days = $4.22 12% for 60 days =
Short-cut “6% - 60 day” Method $844. x 6% x 60 / 360 = ??? $844. = $8.44 You try . . . 6% for 30 days = $4.22 12% for 60 days = $16.88
Determining the (Exact) Due Date • Learn the number of days in each month • poem method • knuckle method • counting days if term of note • stated in days • stated in months
Example of Counting Days A 60-day note dated August 17 is due ________ . 31 - 17 14 + 30 44 + ?? 60 The note is due October 16.
Examples of Counting Months A two-month note dated August 17 is due ______ . October 17 A three-month note dated Nov. 30 is due ______ . February 28 A three-month note dated April 30 is due ______ . July 30
Date Account Title Ref Debit Credit 16 Accounts Receivable - MW 4,000 Sales 4,000 Exercise E9-10 page 442 8/16 Sold merchandise to Max Weinberg on account, $4,000. Should also record reduction in inventory.
Exercise E9-10 page 442 11/1 Loaned $15,000 cash to Jorge Perez on a 1-year, 10% note. Date Account Title Ref Debit Credit 1 Notes Receivable 15,000 Cash 15,000 What about the interest?
interest What about the discount? Ever been lost ... … at DisneyWorld? … in a hospital? … in an office building? Interest 11/1 10/31 You are here!
Exercise E9-10 page 442 12/11 Sold goods to Armie Hammer, Inc., receiving a $6,750, 90-day, 8% note. Date Account Title Ref Debit Credit 1 Notes Receivable 6,750 Sales 6,750 Should also record reduction in inventory.
Rememberthisassumption? Exercise E9-10 page 442 8/16 Sold merchandise to Max Weinberg on account, $4,000. Date Account Title Ref Debit Credit 16 Accounts Receivable - MW 4,000 Sales 4,000 12/16 Received a $4,000, 6-month, 12% note on account from Prentice Berge. Date Account Title Ref Debit Credit 16 Notes Receivable 4,000 Accounts Receivable - PB 4,000
Exercise E9-10 page 442 8/16 Sold merchandise to Max Weinberg on account, $4,000. Date Account Title Ref Debit Credit 16 Accounts Receivable - MW 4,000 Sales 4,000 12/16 Received a $4,000, 6-month, 9% note on account from Max Weinberg. Date Account Title Ref Debit Credit 16 Notes Receivable 4,000 Accounts Receivable - PB 4,000
Exercise E9-10 page 442 8/16 Sold merchandise to Max Weinberg on account, $4,000. Date Account Title Ref Debit Credit 16 Accounts Receivable – MW 4,000 Sales 4,000 12/16 Received a $4,000, 6-month, 9% note on account from Max Weinberg. Date Account Title Ref Debit Credit 16 Notes Receivable 4,000 Accounts Receivable - MW 4,000
earned earned Exercise E9-10 page 442 12/31 Accrued interest revenue on all notes receivable. Date Account Title Ref Debit Credit 31 Interest Receivable Interest Revenue How much?
