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Chapter 8

Chapter 8. Receivables. Accounts Receivable. Individual customer accounts are kept track of in the Accounts Receivable subsidiary ledger Accounts receivable is the Controlling account Credit department examines customers applying for credit; gives approval Investigates “credit worthiness”.

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Chapter 8

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  1. Chapter 8 Receivables

  2. Accounts Receivable • Individual customer accounts are kept track of in the Accounts Receivable subsidiary ledger • Accounts receivable is the Controlling account • Credit department examines customers applying for credit; gives approval • Investigates “credit worthiness”

  3. Accounts Receivable • Bad Debts Expense: records credit sales that customers don’t pay on • Is an operating expense

  4. Accounts Receivable Methods for accounting for uncollectible accounts • Direct write-off method used for tax purposes NOT acceptable under GAAP • Allowance method in compliance with GAAP

  5. Direct write-off • When it is determined that a customer won’t pay, write-off the account Dr. Cr. Bad Debts Expense Accounts Receivable, customer

  6. Direct write-off • If an account that was written off, later makes payment, reinstate the account Dr. Cr. Accounts Receivable, customer Bad debts Expense Then, record the cash payment

  7. Allowance • Matching rule • Match revenue and expenses; record expenses in the same accounting period as you are recording the revenue they generated • Match Bad Debts Expense with the Sale that was recorded

  8. Allowance • It may take a while to determine that an account won’t be collected • So, bad debts expense needs to be estimated

  9. Allowance 2 approaches for estimating bad debts expense 1) Estimate based on percent of sales 2) Estimate based on analysis of receivables

  10. Estimate based on percent of sales Entry to record a credit sale: Dr. Cr. Estimate based on percent of sales method focuses on the Sales part of the journal entry What % of net sales won’t be collected? Answer = Bad debts Expense

  11. Estimate based on percent of sales • Management looks at company history to calculate an estimated % • % X sales* = Bad Debts Expense * May use total sales, credit sales, or net sales • Record as Dr. Bad Debts Expense Cr. Allowance for Doubtful Accounts

  12. Estimate based on analysis of Accounts Receivable Entry to record a credit sale: Dr. Accounts Receivable Cr. Cash Accounts Receivable Aging method focuses on the Accounts Receivable part of the journal entry What amount of Accounts Receivable won’t be collected? Answer =

  13. Estimate based on analysis of Accounts Receivable • Aging schedule: estimates the amount of accounts receivable that won’t be collected • Aging schedule takes every customer account and puts it into a category based on when the account was due • Categories: Not yet due 1-30 days past due 31 – 60days past due 61 – 90 days past due Over 90 days past due

  14. Estimate based on analysis of Accounts Receivable • For each category, management assigns a % that they estimate won’t be collected • A higher % is given to the accounts that have been overdue longer Ex. Not yet due 1% 1-30 days past due 3% 31 – 60days past due 5% 61 – 90 days past due 10% Over 90 days past due 40%

  15. Estimate based on analysis of Accounts Receivable • After each account is placed in a category, and totals are calculated for each category, the assigned percentage is multiplied by the total Ex. Not yet due 1% X Total = A 1-30 days past due 3% X Total = B 31 – 60days past due 5% X Total = C 61 – 90 days past due 10%X Total = D Over 90 days past due 40% X Total = E A + B + C + D + E = estimated accounts receivable that won’t be collected

  16. Estimate based on analysis of Accounts Receivable Estimate of the Accounts Receivable that won’t be collected (taken from the aging schedule) minus Credit Balance in the Allowance for Doubtful Accounts = Bad Debts Expense

  17. Estimate based on analysis of Accounts Receivable Estimate of the Accounts Receivable that won’t be collected (taken from the aging schedule) Plus Debit Balance in the Allowance for Doubtful Accounts = Bad Debts Expense

  18. Estimate based on analysis of Accounts Receivable Journal entry: Dr. Bad Debts Expense Cr. Allowance for Doubtful Accounts After the journal entry is posted, the balance in Allowance for Doubtful Accounts should be the amount from the aging schedule

  19. Writing off an Uncollectible Account • Done when it is known that a customer is not going to pay on their account • Take the account off the books

  20. Writing off an Uncollectible Account • Done when it is known that a customer is not going to pay on their account • Take the account off the books Dr. Cr.

  21. Recovery of Account Receivable Previously Written Off • Customer whose account was previously written off makes payment Make 2 journal entries 1) Reinstate the account Dr. Cr.

  22. Recovery of Account Receivable Previously Written Off • Customer whose account was previously written off makes payment Make 2 journal entries 2) Show collection on account Dr. Cr.

  23. Notes Receivable • Promissory note: promise to pay an amount of money at a future date • Pay back the amount borrowed + interest • With a Note Receivable, the company is owed money + interest

  24. Notes Receivable • Promissory note: promise to pay an amount of money at a future date • Pay back the amount borrowed + interest • With a Note Receivable, the company is owed money + interest • Interest = X X • Maturity Value = Principle + Interest

  25. Notes Receivable • Maturity Date: Date that the note must be paid on • When counting the # of days in a note, don’t count the date of the note, but do count the maturity date

  26. Notes Receivable • Company may ask a customer who is having difficulty paying on their account to sign a promissory note • Company will receive interest revenue • stronger legal claim

  27. Notes Receivable • To record the receipt of a note in payment of an account receivable Dr. Cr.

  28. Notes Receivable To record the collection of the note and interest on the maturity date Dr. Cr.

  29. Dishonored Note • Note that is not paid at the maturity date • Recorded as: Dr. Cr. Accounts Receivable (maturity value) Notes Receivable (face value) Interest revenue

  30. Dishonored Note When the customer eventually pays: Dr. Cr. Cash Accounts Receivable Interest revenue (interest from the date the note was dishonored until the date actually paid)

  31. Accrued Interest • Results when the promissory note is received in one period, but the maturity date is not until the next period • Can’t wait until maturity date to record interest income, or all the interest revenue will be reported on the next period’s financial statements • Need to record the interest revenue that was earned in this accounting period

  32. Accrued Interest Adjusting entry made on last day of the accounting period: Dr. Cr. Interest Receivable * Interest Revenue * Amount = P X R X # of days from date of note until the end of the period 360

  33. Accrued Interest Journal entry made on the maturity date in the next accounting period: Dr. Cr. Cash (maturity value) Notes Receivable (face value) Interest Receivable (amt from adj. ent.) Interest Revenue * * Amount = P X R X # of days from beg. of period . until maturity date . 360

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