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Receivables

Receivables. Setting credit policies Accounting for bad debt Computing interest. Setting credit policies. Why sell on credit ??? Increase sales ??? To remain competitive. Setting credit policies. Should I sell on credit to you? Credit department Approve credit sales Small businesses

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Receivables

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  1. Receivables • Setting credit policies • Accounting for bad debt • Computing interest

  2. Setting credit policies • Why sell on credit ??? • Increase sales ??? • To remain competitive

  3. Setting credit policies • Should I sell on credit to you? • Credit department • Approve credit sales • Small businesses • Generally prefer credit cards • In effect, company’s credit department • Credit scoring for individuals • If denied credit, can get free copy of credit report • Want stability • Don’t apply for a lot of cards at the same time • Credit reports can impact job, rental, life insurance

  4. Bad Debts and Valuing A/R • Bad debts: an expense of selling on credit • It should be matched with sales period that generate bad debts (matching principle) • If no bad debts…

  5. Methods of recording bad debt expense • Direct charge-off: record expense at the time you find you won’t be paid • Entry • Bad Debts Expense • A/R • Acceptable for income tax purposes • Not acceptable for GAAP as violates matching principle

  6. Allowance Method • Bad debt expense is matched against sales in period the sales were recorded • Losses must be estimated since companies don’t know in the period of sale which account will go bad • Should take into account prior experience and current economic conditions • Must be realistic • Subject to manipulation ???

  7. ADA • On balance sheet • Caterpillar • A/R 5,611 • - ADA - 376

  8. Allowance Methods • Percent of sales method • Net sales x % bad debt • For example, $1 million x 5% • Then make this entry • Bad debts expense $50,000 • ADA $50,000 • Focus: income statement, not balance sheet • Not concerned about ADA balance

  9. Allowance Methods • A/R aging method • A/R is aged • Further past due, likelihood of bad debts grows rapidly • For example, 4% of < 30 days; 40% over 90 days • Multiply A/R x % bad debt for each time period • Calculate total balance needed in ADA • Assume need $50,000 and $20,000 already in ADA • Then make this entry • Bad debts expense $30,000 • ADA $30,000 • Focus: balance sheet, not income statement • Not concerned about Bad Debts expense

  10. Entry for write-off of A/R • Already recorded expense when estimated bad debts expense under one of allowance methods • Entry: • ADA • A/R • Reduces ADA and A/R • Net A/R remains the same • If underestimate bad debts, ADA will have a debit balance

  11. Credit Cards • VISA and MasterCard • Credit card slips are similar to depositing checks into company bank account • Discount may range from 2-4% • Entry • Cash 98 • Credit card expense 2 • Sales 100

  12. Credit Cards • Factoring • Sale of receivables • With recourse? • Cost of funds?

  13. Credit Cards • Store credit card • No discount fees • Entry • A/R 100 • Sales 100

  14. Gift Cards • Store gift cards • Stores love these • Entry • Cash 100 • ????? 100 • On expiration date

  15. Notes Receivable • Promissory note versus A/R • A/R • No interest • Unsecured creditor • N/R • Interest • Secured creditor

  16. Calculating Interest • Principal x Rate x Time • Principal = amount loaned • Make sure time and rate are expressed in same units • Interest on $1,000 for 30 days at 10% • 360 day versus 365 day method

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