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Receivables

0. 8. Receivables. 0. 8-1. Classification of Receivables. The term receivables includes all money claims against other entities, including people, business firms, and other organizations. 0. 8-1. Accounts Receivable.

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Receivables

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  1. 0 8 Receivables

  2. 0 8-1 Classification of Receivables The term receivables includes all money claims against other entities, including people, business firms, and other organizations.

  3. 0 8-1 Accounts Receivable Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.

  4. 0 8-1 Notes Receivable Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

  5. 0 8-1 Other Receivables Other receivables expected to be collected within one year are classified as current assets. If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.

  6. 0 8-2 Uncollectible Receivables There are two methods of accounting for receivables that appear to be uncollectible: the direct write offmethod and the allowance method.

  7. 0 8-2 The direct write offmethod records bad debt expense only when an account is judged to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.

  8. 0 8-3 Direct Write-Off Method On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. May 10 Bad Debt Expense 4 200 00 Accounts Receivable—D. L. Ross 4 200 00 15

  9. 0 8-3 The amount written off is later collected on November 21. Nov. 21 Accounts Receivable—D. L. Ross 4 200 00 Bad Debt Expense 4 200 00 21 Cash 4 200 00 Accounts Receivable—D. L. Ross 4 200 00 16

  10. 0 8-3 The direct write-off method is used by businesses that sell most of their goods or services for cash and accept only MasterCard or Visa, which are recorded as cash sales.

  11. Example Exercise 8-1 0 8-3 Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment. 18

  12. Follow My Example 8-1 0 8-3 July 9 Cash 1,200 Bad Debt Expense 3,900 Accounts Receivable—Jay Burke 5,100 Oct. 11 Accounts Receivable—Jay Burke 3,900 Bad Debt Expense 3,900 11 Cash 3,900 Accounts Receivable—Jay Burke 3,900 19 For Practice: PE 8-1A, PE 8-1B

  13. 0 8-4 The allowance method is required by generally accepted accounting principles for companies with large accounts receivable. In contrast to the direct write-off method, the allowance method estimates the accounts receivable that will not be collected and records bad debt expense for this estimate at the end of each accounting period.

  14. 0 8-4 Allowance Method On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Dec. 31 Bad Debt Expense 40 000 00 Allowance for Doubtful Accounts 40 000 00 Uncollectible accounts estimate. 22

  15. 0 8-4 Net Realizable Value The net amount that is expected to be collected, $960,000 ($1,000,000 – $40,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.

  16. 0 8-4 On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible. Jan. 21 Allowance for Doubtful Accounts 6 000 00 Accounts Receivable—John Parker 6 000 00 To write off the uncollectible account. 24

  17. 0 8-4 During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750).

  18. 0 8-4 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $36,750 Jan. 21 6,000 Feb. 2 3,900 “ “ “ “ Dec. 31 Unadjusted bal 3,250 27

  19. 0 8-4 If ExTone Company had written off $44,100 in accounts receivable during 2008, the Allowance for Doubtful Accounts would have a debit balance of $4,100.

  20. 0 8-4 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $44,100 Jan. 21 6,000 Feb. 2 3,900 “ “ “ “ Dec. 31 Unadjusted bal 4,100 29

  21. 0 8-4 Collecting a Written-Off Account Nancy Smith’s account of $5,000 which was written off on April 2 is later collected on June 10. Two entries are needed: one to reinstate Nancy Smith’s account and a second to record receipt of the cash.

  22. 0 8-4 Entry 1: Reinstate the account. June 10 Accounts Receivable—Nancy Smith 5 000 00 Allowance for Doubtful Accounts 5 000 00 To reinstate the account written off on Jan. 21. 31

  23. 0 8-4 Entry 2: Record collection of cash. June 10 Cash 5 000 00 Accounts Receivable—Nancy Smith 5 000 00 Collection of written-off account. 32

  24. Example Exercise 8-2 0 8-4 Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment. 33

  25. Follow My Example 8-2 0 8-4 July 9 Cash 1,200 Allowance for Doubtful Accounts 3,900 Accounts Receivable—Jay Burke 5,100 Oct. 11 Accounts Receivable—Jay Burke 3,900 Allowance for Doubtful Accounts 3,900 11 Cash 3,900 Accounts Receivable—Jay Burke 3,900 34 For Practice: PE 8-2A, PE 8-2B

  26. 0 8-4 Estimating Uncollectibles The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. • Estimate based on a percentage of sales. • Estimate based on analysis of the receivables.

  27. If credit sales for the period are $3,000,000 and it is estimated that 1½ % will be uncollectible, the Bad DebtExpenseis debited for $45,000 ($3,000,000 x .015). This approach disregards the balance in the allowance account before the adjustment. 0 8-4 Estimate Based on a Percentage of Sales

  28. 0 8-4 After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250. Dec. 31 Bad Debt Expense 45 000 00 Allowance for Doubtful Accounts 45 000 00 Uncollectible accounts ($3,000,000 x 0.015 = $45,000). 37

  29. 0 8-4 BAD DEBT EXPENSE Dec. 31 Adj entry 45,000 Dec. 31 Adjusted bal. 45,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $36,750 Jan. 21 6,000 Feb. 2 3,900 “ “ Dec. 31 Unadjusted bal 3,250 Dec. 31 Adj. entry 45,000 Dec. 31 Adjusted bal. 48,250 38

  30. Example Exercise 8-3 0 8-4 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 39

  31. Follow My Example 8-3 Adjusted Balance • Accounts Receivable $800,000 • Allowance for Doubtful Accounts • ($7,500 + $17,500) 25,000 • Bad Debt Expense 17,500 0 8-4 • $17,500 ($3,500,000 x .005) • $775,000 ($800,000 – $25,000) 40 For Practice: PE 8-3A, PE 8-3B

  32. 0 8-4 Estimating Uncollectibles Based on Analysis of Receivables The longer an account receivable is outstanding, the less likely that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables.

  33. 0 8-4 Aging of Accounts Receivables 42

  34. 0 8-4 Estimate of Uncollectible Accounts 43

  35. 0 8-4 Estimate Based on Analysis of Receivables If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance forUncollectibleAccountscurrently has a balance of $510, theBad DebtExpensemust be debited for $2,880 ($3,390 – $510). 45

  36. 0 8-4 Estimate Based on Analysis of Receivables Aug. 31 Bad Debt Expense 2 880 00 Allowance for Doubtful Accounts 2 880 00 Uncollectible accounts ($3,390 – $510). 46

  37. 0 8-4 BAD DEBT EXPENSE Aug. 31 Adj. entry 2,880 Aug. 31 Adj. bal. 2,880 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Unadj. bal. 510 Aug. 31 Adj. entry 2,880 Aug. 31 Adj. bal. 3,390 47

  38. 0 8-4 If the unadjusted balance of Allowance forUncollectibleAccounts had been a debit balance of $300, the amount of the adjustment would have been $3,690 ($3,390 + $300).

  39. 0 8-4 BAD DEBT EXPENSE Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,690 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,390 Aug. 31 Unadj. bal. 300 49

  40. Example Exercise 8-4 0 8-4 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable. 50

  41. Follow My Example 8-4 Adjusted Balance • Accounts Receivable $800,000 • Allowance for Doubtful Accounts 30,000 • Bad Debt Expense 22,500 0 8-4 • $22,500 ($30,000 – $7,500) • $770,000 ($800,000 – $30,000) 51 For Practice: PE 8-4A, PE 8-4B

  42. Amount of bad debt expense recorded Allowance account Primary users 54 0 8-5 Comparing the Direct Write-Off and Allowance Methods Direct Write-Off Method When the actual accounts receivable are determined to be uncollectible No allowance account is used Small companies and companies with relatively few receivables

  43. Amount of bad debt expense recorded Allowance account Primary users 55 0 8-5 Comparing the Direct Write-Off and Allowance Methods Allowance Method Using estimate based on either (1) a percentage of sales or (2) analysis of receivables. The allowance account is used Large companies and those with a large amount of receivables

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