RECEIVABLES & SALES

RECEIVABLES & SALES CHAPTER FIVE

Homework • P1 - Sales Discounts • P2 – Sales Allowance • P3 – Allowance Method of Uncollectibles • P4 – Write Off Uncollectibles • P8 – Notes Receivable

Credit Sales and discounts • Contra Revenues • Allowance methods • Write Off A/R • Aging A/R • Direct W/O • Receivable Analysis • Notes Receivable • Percentage of Sales Method- Allowance

Accounts Receivable transactions • Credit Sales • Accounts Receivable (Amount of invoice) • Sales • Freight-out • Receive Payment • Cash • A/R

Contra Revenue Accounts • Sales Discount • Sales Returns • Sales Allowances

DISCOUNTS • TRADE DISCOUNTS • a reduction in the selling price of the item as a reward for buying large quantities. • SALES DISCOUNTS (pg 285) • a reduction in the amount the customer needs to pay as a reward for paying earlier than required

TERMS • 2/10 Net 30 • 2% if paid in 10 days, full amount in 30 days • 1/15 Net 60

Sales Discount Transaction • Credit Sales – no discount until paid • A/R 500 • Sales 500 • Payment – Discount is recorded when paid • Cash 490 • Sales Discount(2%) 10 • A/R 500 • (take it out for the amount you put it in)

Sales Discount exercises • Do E5-3, 5-4 page 246

Sales Returns & Allowance • SALES RETURNS • If it doesn’t work or your customer doesn’t want it, it can returned and the customer will get their money back • SALES ALLOWANCE • If you give a reduction in the price of the item you sold and they keep the item.

Sales Returns & Allow transaction • Credit Sale • A/R 1000 • Sales 1000 • Return • Sales Return and Allowance 300 • A/R 300 • Customer Payment • Cash 700 • A/R 700

NET SALES • SALES 1500 • -- Sales Returns & Allowances 300 • -- Sales Discount 10 • ----------------------------------------- ------- • NET SALES 1190

Sales Return and Allowance • Exercise 5-6 page 247

Bad Debt (Uncollectible) When a customer cannot or will not pay the invoice. Four methods: Direct Write off Method Allowance Methods: Percentage of Receivables Aged A/R Percentage of Sales

Direct Write off Method • Use when you have only a few uncollectible invoices and it occurs infrequently. • Transaction: • Bad Debt Expense • A/R

ALLOWANCE ACCOUNT • Set aside of costs that will not occur until the next period but revenue is recorded in current year. • Use when you have several customers who do not pay you and it happens frequently during the same year.

Can’t charge A/R because we don’t know which one will be uncollectible • Fraud Alert or Income Manipulating • If overstate the uncollectible –understate income and income tax • Do not have to worry until the next year. • If audited will need to provide an aged A/R to prove your uncollectible A/C expense

Accounts used • Uncollectible Account Expense • or BAD DEBT Expense • Always a debit balance account • Non- Cash transaction • Allowance for uncollectible – Contra Asset Account • Should be a credit balance

Setting up or adjusting entry - 2009 • Bad Debt Expense 5000 • Uncollectible Account Expense 5000 • Effects Net Income • Writing off bad A/R in 2010 • Uncollectible Account Expense 4000 • A/R 4000 • Does not effect net income

Allowance t-account • ___________________________________ Write off A/R | Setting up or adding to | | 5000 4000 | ------------------------------------------------- 1000 Balance Wrote off less than estimated

___________________________________ Write off A/R | Setting up or adding to | | 5000 7000 | ------------------------------------------------- 2000 Balance Wrote off more than estimated

Accounts Receivable • Less Allow.for Uncollectible Accts • = Net Receivables • (Net realizable value) • Exercise 5-7 pg 247

Exercise 5-13 page 248 • Compare allowance method with the direct write off method and the effect on income tax.

Aging Method • More accurate • Use if you do not have historical data • It is the balance in the allowance account – not the adjusting entry • See page 228 for Aging schedule • Exercise 5-11 page 248

Percentage of Sales • Percentage of A/R --- Balance Sheet Method • Good because it is closest to net realized value • Most accepted method • Percentage of Credit Sales – Income Statement Method • Good because better matched with revenue • Only accepted if the amounts do not differ significantly from Percentage of Receivables • Exercise E5-19 page 249

Receivable Analysis • Good to get when you first start the job or higher a new person. • Later show how you have helped to improve A/R collections • Receivables turnover ratio • Average collection period

Receivables turnover ratio -- # of times during the year the Avg A/R is collected or turned over • Net Credit Sales • Avg A/R • Higher the number of times, the better. • Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R

Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R • Your Invoice terms are used to see if good or bad • If Net 30 is terms you days should be around 30. • 365 • A/R Turnover • Exercise E5-14 page 249

NOTES RECEIVABLE More formal and legally bound form of credit sales. Usually a note is a loan that is signed and has an interest component .

Note Terminology • Face Value – Principle of the note • Due date- date it is to be paid back (DUH!!!) • Payee – who is to receive the money • Maker – who is to pay the money • Interest rate- rate is in annual terms.

Note Transactions • A note for an accounts receivable • SellerBuyer • Notes Receivable (N/R) A/P • A/R Notes Payable (N/P) • Note is paid • Cash N/P • Interest Income Interest Expense • N/R Cash

Interest Calculations • I=PRT • Interest = Principle X rate X time • Rate • 12% = 1% month • 6% = .5% month • 18%= 1.5% month • 24% = 2% month • Principle is $10,000 rate is 12% time is 2 months the interest is: 10000 X 1% X 2 = $200 • Exercise 5-16 pg 249

Interest Receivable Adjust Entry • Interest earned but not yet paid - ACCRUAL • Adjusting Journal Entry – for the month of the year • Interest Receivable • Interest Income • When note is paid • Cash • N/R Interest Receivable Interest Income Exercise 5-18 page 249

RECEIVABLES & SALES