Chapter 8. Define and explain common types of receivables

Chapter 8

Define and explain common types of receivables

Arise from selling goods and services on credit and lending money

Right to receive cash in the future from a current transaction

An asset Two major types

◦ Accounts receivable ◦ Notes receivable

Amounts to be collected from customers for sales on credit

Serves as a control account◦ Summarizes total of all individual customer

receivables Customer ledger

◦ Subsidiary ledger showing each customer’s balance

More formal than accounts receivable Usually longer in term

◦ Debtor promises to pay by maturity date Charge interest to the borrower Promissory note

◦ Written document signed by both parties

Design internal controls for receivables

Credit department evaluates customers’ applications

Separation of duties◦ Credit department should not handle cash◦ Cash handlers should not extend credit

Selling on credit:◦ BENEFIT – Increase sales by selling to a wider

range of customers◦ COST – Some customers don’t pay

Results in Uncollectible-account expense Two methods to account for uncollectible

accounts◦ Allowance method◦ Direct write-off method

Use the allowance method to account for uncollectibles

Based on the matching principle◦ Record uncollectible accounts expense in same

period as sale◦ Expense is estimated from past experience

Offset to expense is Allowance for uncollectible accounts◦ A contra asset, contra to Accounts receivable

Percent-of-Sales◦ Income-Statement

Approach◦ Estimates

uncollectible accounts as a percent of sales

Aging-of-Accounts-Receivable◦ Balance-Sheet

Approach◦ Determine target

Allowance based on age of actual receivables

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Uncollectible accounts expense

Allowance for uncollectible accounts

To estimate bad debts for period

Operating expenseOperating expense

Contra-asset accountContra-asset account

Credit salesCredit sales%

uncollectible

% uncollectibl

Uncollectible account expense

Adjust Allowance for uncollectible accounts

to Aging schedule Aging schedule

Uncollectible accounts expense is the difference

between the target Allowance balance based

on the aging schedule and the current Allowance

account balance

Uncollectible accounts expense is the difference

between the target Allowance balance based

on the aging schedule and the current Allowance

account balance

GENERAL JOURNAL

Dec 31

Uncollectible account expense 210

0-60 Days Over 60 days

$71,000 $6,000 $77,000

x 1% x 20%

$710 $1,200 $1,910

Allowance for uncollectible accts

$1,700

Adjustment needed $210

$1,700

$1,910

Adjusting entry

Aging schedule

When a specific customer account is identified as uncollectible, it is written off

Entry:

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Accounts receivable-name

Sometimes a customer will pay the amount owed after the customer’s account is written off

Two entries needed

Allowance for uncoll. accounts

Reverses write off

Records payment

Increases (debits) Sales on credit

Decreases (credits)

Customer payments

Write-offs

Decreases (debits)

Write-offs

Increases (credits) Uncollectible-

account expense entry

Recoveries of accounts previously written off

Understand the direct write-off method for uncollectibles

Used by small businesses No Allowance for uncollectible accounts Records Uncollectible-accounts expense

when specific account is written off

Uncollectible account expense

Accounts receivable-nameWrite off account using direct write off method

Overstates Accounts receivable on the balance sheet◦ No Allowance account

Violates matching principle◦ Uncollectible-account expense often not in same

period as sale

Report receivables on the balance sheet

Current asset Shown net of Allowance for uncollectible

accounts Two presentation styles:

Current assets:Accounts receivable $$$$$Less: Allowance for uncollectible accounts ($$$$)

Accounts receivable, net $$$$$

Assets

Balance Sheet (Partial) December 31, 2012

AssetsCurrent assets: Accounts receivable, net of allowance for doubtful accounts of $$$ $$$$$

Journalize credit-card, bankcard, and debit-card sales

Credit card companies (American Express and Discover) pay the retailer and bill the customer

Credit card company charges a fee to the retailer◦ 1 – 5%

GENERAL JOURNAL

Accounts receivable – Discover

Credit-card discount expense

Sales revenue

Retailers receive cash at time of sale VISA and MasterCard most common bank

cards Charge retailer a fee

GENERAL JOURNAL

Bankcard discount expense

Sales revenue

A business that accepts Bank cards (VISA and Mastercard) will have a relationship/account with a “merchant bank”

When the card is run up and submitted to the bank, the bank is automatically adding the amount to the cardholders loan amount and advancing cash into the merchant’s account with the bank.◦ Can be done now automatically through phone

lines and Internet

Different than credit and bankcards Same as cash

◦ Amount subtracted from buyer’s bank account◦ Amount added to retailer’s bank account

The fundamental difference isn’t so different The merchant has to go through a

“merchant” bank. The merchant does not have to pay a “fee”

for this service because the bank is happy to have the cardholder’s money sitting in its bank.

Account for notes receivable

More formal than Accounts receivable Debtor signs promissory note

◦ A written promise to pay a specified amount of money at a particular future date

PROMISSORY NOTE______________ _____________ Amount Date For value received, I promise to pay to the order of First National Bank

__________________________________ Dollars

on ______________________________ plus interest at the annual rate of 12%.

________________________

PROMISSORY NOTE______________ _____________ Amount Date For value received, I promise to pay to the order of First National Bank

__________________________________ Dollars

on ______________________________ plus interest at the annual rate of 12%.

________________________

$10,000.00

Ten thousand and no/100---------------------

Oct. 4, 2010

January 2, 2011

Jeanette Sims

InterestStarts

MakerMaturity

Date Interest Rate

Principal

Maturity date can be:◦ A specific date, such as March 13◦ Stated in terms of number of months

A three month note signed on March 13 would be due on June 13

◦ Stated in terms of number of days Must count days from issue date to maturity day Example on following slide

A 90-day note issued March 13

Days in note 90

Days in March 31

Date of issue -13

Days outstanding in March -18

Days remaining 72

Days in April 30

Days in May 31 -61

Due date in June 11

Amount of noteAmount of note

Annual interest rate

# of months

# of days360

If any notes receivable are outstanding at the end of the period, interest must be accrued

Interest is earned over time Revenue must be recorded in the period

earned

Date of Note,Aug 1, 2011

End of Fiscal Year,Dec 31, 2011

Maturity Date,May 1, 2012

Note term = 9 months

5 months

4 months

Jan 3 Cash 101,920

Bankcard discount expense

Sales revenue 104,000

Oct 1 Notes receivable 24,000

Cash 24,000

Dec 31 Interest receivable 600

Interest revenue 600

(24,000 x 10% x 3/12)

GENERAL JOURNAL

1 Cash 26,400

Interest receivable 600

Interest revenue 1,800

Notes receivable 24,000

Interest revenue = 24,000 x .10 x 9/12

If the maker does not pay the note on the due date, the note is dishonored

The note is expired, but the maker still owes the company for the maturity value

An entry is made to convert the note into an account receivable

Notes receivable-name

Interest revenue

Chapter 8. Define and explain common types of receivables

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