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Chapter Chapter 88ReceivablesReceivables
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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1. List the common classifications of receivables.2. Summarize and provide examples of internal
control procedures that apply to receivables.3. Describe the nature of and the accounting for
uncollectible receivables.4. Journalize the entries for the allowance
method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
5. Journalize the entries for the direct write-off of uncollectible receivables.
ObjectivesObjectivesObjectivesObjectives
6. Describe the nature and characteristics of promissory notes.
7. Journalize the entries for notes receivable transactions.
8. Prepare the Current Assets presentation of receivables on the balance sheet.
9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables.
Classification of ReceivablesClassification of Receivables Accounts Receivable—used for selling
merchandise or services on credit, and normally expected to be collected in a relatively short period.
Notes Receivable—used to grant credit on the basis of a formal instrument of credit, called a promissory note.
Other Receivables—include interest receivable, taxes receivable, and receivables from officers and employees.
Acctg. Info
CollectionsCollections
Invoice
Acctg.Info.
AccountingAccounting
Goods or
services
SalesSales
Separating the Receivable FunctionsSeparating the Receivable FunctionsSeparating the Receivable FunctionsSeparating the Receivable Functions
CreditInfo.Credit Credit
ApprovalApproval
Uncollectible ReceivablesUncollectible Receivables Uncollectible ReceivablesUncollectible Receivables
Companies often sell their receivables to other
companies. This transaction is called
factoring the receivables, and the
buyer of the receivables is called a factor.
Companies often sell their receivables to other
companies. This transaction is called
factoring the receivables, and the
buyer of the receivables is called a factor.
Uncollectible ReceivablesUncollectible Receivables Uncollectible ReceivablesUncollectible Receivables
This method is consistent with the matching principle.
Management makes an estimate each year of the portion of accounts receivable that may not be collectible.
Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited.
Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
The Allowance MethodThe Allowance Method The Allowance MethodThe Allowance Method
Dec. 31 Uncollectible Accounts Expense 4 000 00
Allowance for Doubtful Accounts 4 000 00
On December 31, Cynthia Richards estimates On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in that a total of $4,000 of the $105,000 balance in
her company’s her company’s Accounts ReceivableAccounts Receivable will eventually be uncollectible.
On December 31, Cynthia Richards estimates On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in that a total of $4,000 of the $105,000 balance in
her company’s her company’s Accounts ReceivableAccounts Receivable will eventually be uncollectible.
Adjusting Entry
The net amount that is expected to be collected,
$101,000 ($105,000 – $4,000), is called the net realizable value (NRV).
The net amount that is expected to be collected,
$101,000 ($105,000 – $4,000), is called the net realizable value (NRV).
The Allowance MethodThe Allowance Method The Allowance MethodThe Allowance Method
The adjusting entry The adjusting entry reduces receivables to reduces receivables to the NRV and matches the NRV and matches uncollectible expenses uncollectible expenses
with revenues.with revenues.
The adjusting entry The adjusting entry reduces receivables to reduces receivables to the NRV and matches the NRV and matches uncollectible expenses uncollectible expenses
with revenues.with revenues.
The The adjusting adjusting entry fills entry fills
the bucket.the bucket.
The The adjusting adjusting entry fills entry fills
the bucket.the bucket.
Adjusting
Entry
Allowance for
Doubtful Accounts
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Writing off Writing off accounts accounts
empties the empties the bucket.bucket.
Writing off Writing off accounts accounts
empties the empties the bucket.bucket.
Allow
ance
for
DO
UB
TFUL
accounts
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
On January 21, John Parker’s account totaling $610 is considered to be
uncollectible.
On January 21, John Parker’s account totaling $610 is considered to be
uncollectible.
Jan. 21 Allowance for Doubtful Accounts 610 00
Accounts Receivable—John Parker 610 00
To write off the uncollectible account.
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
On June 10, the written-off account is collected.
On June 10, the written-off account is collected.
Jun. 10 Accounts Receivable—John Parker 610 00
To reinstate the account written off on Jan. 21.
An entry is made to reinstate John Parker’s account.
An entry is made to reinstate John Parker’s account.
Allowance for Doubtful Accounts 610 00
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
A second entry is made to record receipt of the cash.
A second entry is made to record receipt of the cash.
Jun. 10 Cash 610 00
Accounts Receivable—John Parker 610 00
To record collection on account.
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Estimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts Expense
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3,000.
The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Dec. 31 Uncollectible Accounts Expense 3 000 00
Allowance for Doubtful Accounts 3 000 00
Adjusting Entry
Based on a Percentage of SalesBased on a Percentage of SalesBased on a Percentage of SalesBased on a Percentage of Sales
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Estimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts currently has a balance of $510, the Uncollectible Accounts Expense must be debited for $2,880 ($3,390 – $510).
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Dec. 31 Uncollectible Accounts Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00
Adjusting Entry
Based on an Analysis of ReceivablesBased on an Analysis of ReceivablesBased on an Analysis of ReceivablesBased on an Analysis of Receivables
The Allowance Method The Allowance Method The Allowance Method The Allowance Method
Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
Not Days Past DuePast over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
Saxon Woods 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
Total accounts receivable shown by age.
2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%
Uncollectibles
PERCENT
Uncollectible percentages based on experience and industry averages.
Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
Not Days Past DuePast over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
Saxon Woods 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%
Uncollectibles
PERCENT
AMOUNT $3,390 =$3,390 = $1,500$1,500 $200$200 $310$310 $380$380 $360$360 $400$400 $240 $240
Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
Not Days Past DuePast over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
Saxon Woods 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Year-End Adjustment for UncollectiblesYear-End Adjustment for UncollectiblesYear-End Adjustment for UncollectiblesYear-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300AA
Allowance for Doubtful Accts.
510
Uncollectible Accts. Expense
Accounts receivable $86,300Less allowance for doubtful accounts 3,390
Net realizable value $82,910
Balance Sheet
AA
Balances before adjustmentAA
Year-end adjustment: $3,390 – $510 = $2,880
BB2,880BB
2,880 BB
Balance after adjustmentCC
3,390 CC
CC
Accounting for Uncollectible Accounts ReceivableAccounting for Uncollectible Accounts Receivable
This method is not consistent with the matching principle.
Accounts that prove to be uncollectible are written off in the year they become worthless.
Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction.
The Direct Write-Off Method The Direct Write-Off Method
The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method
On May 10, D. L. Ross’ account was On May 10, D. L. Ross’ account was determined to be uncollectible. The determined to be uncollectible. The
$420 balance is written off the books.$420 balance is written off the books.
On May 10, D. L. Ross’ account was On May 10, D. L. Ross’ account was determined to be uncollectible. The determined to be uncollectible. The
$420 balance is written off the books.$420 balance is written off the books.
May 10 Uncollectible Accounts Expense 420 00
Accounts Receivable—D. L. Ross 420 00
To write off an uncollectible account.
In November, D. L. Ross remits a check In November, D. L. Ross remits a check for $420 in payment of his account.for $420 in payment of his account.
In November, D. L. Ross remits a check In November, D. L. Ross remits a check for $420 in payment of his account.for $420 in payment of his account.
Nov. 1 Accounts Receivable—D. L. Ross 420 00
Uncollectible Accounts Expense 420 00
To reinstate account written off on May 10.
The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method
1st Entry
A second entry is needed to record A second entry is needed to record receipt of the cash.receipt of the cash.
A second entry is needed to record A second entry is needed to record receipt of the cash.receipt of the cash.
Nov. 1 Cash 420 00
Accounts Receivable—D. L. Ross 420 00
To record collection on account.
The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method
2nd Entry
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
$_____________Fresno, California______________20___March 16 06
________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We
THE ORDER OF ____________________________________________ Judson Company
_________________________________________________DOLLARSTwo thousand five hundred 00/100---------------------------PAYABLE AT ______________________________________________
City National Bank
VALUE RECEIVED WITH INTEREST AT ____10%
2,500.00
NO. _______ DUE___________________14 June 14, 2006
TREASURER, WILLIARD COMPANYH. B. Lane
PayeePayeePayeePayee
MakerMakerMakerMaker
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of the principal (face) amount per year
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of the principal (face) amount per year
A promissory note is a written document containing a promise to pay:
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
The date a note is to be paid is called the due date. It is also
referred to as the maturity date.
The date a note is to be paid is called the due date. It is also
referred to as the maturity date.
Let’s determine the due date for a 90-day note dated March 16.
Let’s determine the due date for a 90-day note dated March 16.
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
Total days in note 90 daysNumber of days in March 31Issue date of note March 16Remaining days in March –15 days
75 daysNumber of days in April –30 days
45 daysNumber of days in May –31 daysResidual days in June 14 days
Answer: June 14Answer: June 14
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
The amount that is due at the maturity or due date is called
the maturity value.
The amount that is due at the maturity or due date is called
the maturity value.
Received a $6,000, 12%, 30-day note dated November 21, 2006 in settlement
of the account of W. A Bunn Co.
Received a $6,000, 12%, 30-day note dated November 21, 2006 in settlement
of the account of W. A Bunn Co.
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00
Interest CalculationInterest Calculation
Maturity Value CalculationMaturity Value Calculation
Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
A $6,000 30-day, 12% note dated A $6,000 30-day, 12% note dated November 21 is received from W. A Bunn November 21 is received from W. A Bunn
Company in exchange for merchandise.Company in exchange for merchandise.
A $6,000 30-day, 12% note dated A $6,000 30-day, 12% note dated November 21 is received from W. A Bunn November 21 is received from W. A Bunn
Company in exchange for merchandise.Company in exchange for merchandise.
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12% note
dated November 21, 2006.
On December 21, when the note matures, On December 21, when the note matures, the firm receives $6060 from W. A. Bunn the firm receives $6060 from W. A. Bunn
Company ($6,000 plus $60 interest).Company ($6,000 plus $60 interest).
On December 21, when the note matures, On December 21, when the note matures, the firm receives $6060 from W. A. Bunn the firm receives $6060 from W. A. Bunn
Company ($6,000 plus $60 interest).Company ($6,000 plus $60 interest).
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Received principal and interest
on matured note.
Interest Revenue 60 00
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
If W. A. Bunn Company fails to pay the note on If W. A. Bunn Company fails to pay the note on the due date, it is considered a the due date, it is considered a dishonored note dishonored note receivablereceivable. The note and interest are transferred . The note and interest are transferred
to the customer’s account.to the customer’s account.
If W. A. Bunn Company fails to pay the note on If W. A. Bunn Company fails to pay the note on the due date, it is considered a the due date, it is considered a dishonored note dishonored note receivablereceivable. The note and interest are transferred . The note and interest are transferred
to the customer’s account.to the customer’s account.
Dec. 21 Accounts Receivable—Bunn Co. 6 060 00
Notes Receivable 6 000 00
To record dishonored note and
interest.
Interest Revenue 60 00
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
A 90-day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4,000.
A 90-day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4,000.
Dec. 1 Notes Receivable 4 000 00
Accounts Receivable—Crawford
Company 4 000 00
Received note in settlement of
account.
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest
of $40 ($4,000 x 0.12 x 30/360).
Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest
of $40 ($4,000 x 0.12 x 30/360).
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00 Adjusting entry for accrued
interest.
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
On March 1, 2004, $4,120 is received for On March 1, 2004, $4,120 is received for the note ($4,000) and interest ($120).the note ($4,000) and interest ($120).
On March 1, 2004, $4,120 is received for On March 1, 2004, $4,120 is received for the note ($4,000) and interest ($120).the note ($4,000) and interest ($120).
Mar. 1 Cash 4 120 00
Notes Receivable 4 000 00
Interest Receivable 40 00
Interest Revenue 80 00
Received payment on note and
interest.
$4,000 x $4,000 x 0.12 x 0.12 x 60/36060/360
$4,000 x $4,000 x 0.12 x 0.12 x 60/36060/360
Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable
Receivables on the
Balance Sheet
AssetsCurrent assets:
Cash $119,500Notes receivable 250,000Accounts receivable $445,000
Less allowance for doubtful accounts 15,000 430,000
Interest receivable 14,500Merchandise inventory 714,000
Crabtree Co. Balance SheetDecember 31, 2006
Highlighted items are receivables
Financial Analysis and Interpretation
Accounts Receivable TurnoverNet sales
Average accounts receivable
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
2006 2005Net sales on account $36,000,000 $32,500,000Accounts receivable (net):
Beginning of year $ 1,080,000 $1,050,000End of year 1,220,000 1,080,000Total $2,300,000 $2,130,000
Average $1,150,000 $1,115,000
Accounts receivable turnover 31.3 times 29.1 times
$36,000,000$1,150,000
$32,500,000$1,115,000
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Accounts receivable, end of year
Average daily sales on account$1,220,000
($36,000,000 ÷ 365 days)=12.4 days
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Accounts receivable, end of year
Average daily sales
The EndThe End
Chapter 8Chapter 8