ACCOUNTING FOR RECEIVABLES

Lecture 51

ReceivablesReceivables

Receivables

Current receivables

Noncurrent receivables

Receivable- claims expected to be collected in cash from customers and others for service or goods sold on account.

For reporting purpose

ReceivablesReceivables

Trade receivables

Nontrade receivables

Account receivable

Notes receivable

Other receivables

ACCOUNTS RECEIVABLE . . .

Accounts Receivable are . . .

Short-term, liquid assets that arise from credit sales to customers.

Are usually converted to cash within 10 to 60 days.

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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.

ACCOUNTS RECEIVABLE . . .

There are three primary problems associated with Receivables . . .

Recognition

Valuation

Disposition

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Recognition

RECOGNIZING ACCOUNTS RECEIVABLE

DiscountsDiscounts

Trade discounts

Cash discounts

Trade discounts- percentage reduction from the list price

Cash discounts – reductions not in the selling price of good or service, but in the amount to be paid by a credit customer if paid within a specified period of time. It is discount intended to provide incentive for quick payment

RECOGNIZING ACCOUNTS RECEIVABLE

The amount of the discount and time period within which it’s available usually are conveyed by cryptic terms like 2/10, n/30This terms meaning a 2% discount if paid within 10 days, otherwise full payment within 30 days.

RECOGNIZING ACCOUNTS RECEIVABLE

RECOGNIZING ACCOUNTS RECEIVABLE

Æèøýý íü : 5 ñàðûí 15-íä 2/10, n/20 ãýñýí íºõöºëòýéãýýð 200000₮ -èéí ¿íýòýé áàðààã áîðëóóëñàí. Õóäàëäàí àâàã÷ 5.22-íä 120000₮, 5.27-íä ¿ëäýãäýë òºëáºðèéã òóñ òóñ ã¿éöýòãýâ.  

Two ways to record cash discounts

Gross method

Net method

GROSS METHOD

5/15 Dt Accounts receivable 200,000 Ct Sales revenue 200,000

5/22 Dt Cash 117,600 Dt Sales discount 2,400 Ct Accounts receivable 120,0005/27 Dt Cash 80,000 Ct Accounts receivable 80,000

NET METHOD

5/15 Dt Accounts receivable 200,000 Ct Sales revenue 200,000

5/22 Dt Cash 117,600 Ct Accounts receivable 117,6005/27 Dt Cash 80,000 Ct Accounts receivable 78,400 Ct Loss of sales discount 1,600

Loss of sales discount

Income statement:Other income

RECOGNIZING ACCOUNTS RECEIVABLE

TRADE DISCOUNTS

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Жишээ нь: “А” компани зээлээр борлуулалт хийсэн.

Жагсаалтын үнэ 1500,000₮Худалдааны хөнгөлөлт 10- 5- 2

Dt Accounts receivable 1256,850 Ct Sales revenue

1256,850

VALUING ACCOUNTS RECEIVABLE

-They are stated at their net realizable value- Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS

There are two methods of accounting for Uncollectible Accounts . . .

The direct write-off method; and

The allowance method.

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Direct Write-Off

Meth

od 1

On January 23, TechCom determines it cannot collect $520 from Jack Kent, a credit customer.

On January 23, TechCom determines it cannot collect $520 from Jack Kent, a credit customer.

Direct Write-Off Method

If Jack Kent later pays the $520, the previous entry is simply reversed and the cash collection

is recorded.

If Jack Kent later pays the $520, the previous entry is simply reversed and the cash collection

is recorded.

Direct Write-Off Method

Allowance Method

Meth

od 2

At the end of each period, estimate total bad debts expected to be realized from that

period’s sales.

At the end of each period, estimate total bad debts expected to be realized from that

period’s sales.

This is a contra-asset account.This is a contra-asset account.

Allowance Method

ESTIMATING BAD DEBTS EXPENSE

Percent of Sales Method

Percent of Accounts Receivable Methods

Based on Balance of Accounts Receivable Method

Aging of Accounts Receivable Method

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Estimate the amount of uncollectible accounts.

Based on: Sales

Accts Rec

xxx

xxx

or

Allowance for Doubtful

Accounts

xxx

Bad Debts

Expense

xxx

Then Credit the Allowance account

And Debit the Expense Account

Percent of Sales

Method

Meth

od 1

PERCENT OF SALES METHOD

Bad debts expense is computed as follows:

Estimated Bad Debts Expense= Current period sales * Bad debt %

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PERCENT OF SALES METHOD

MusicLand has credit sales of $400,000 in 2011.

MusicLand estimates 6% of credit sales are uncollectible.

What is Bad Debts Expense for 2011?

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Allowance Method

$400,000

X 0.06%

= $2,400

MusicLand computes estimated Bad Debts Expense

of $2,400

Percent of Accounts

Receivable Method

Meth

od 2

BASED ON BALANCE OF ACCOUNTS RECEIVABLE METHOD

Compute the estimate of the Allowance for Doubtful Accounts.

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Year-End Accounts Receivable x Bad Debt %

Bad Debts Expense is computed as:

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MusicLand has $50,000 in Accounts Receivable and a $200 credit balance in Allowance for Doubtful Accounts on December 31, 2011.

Past experience suggests that 5% of receivables are uncollectible.

What is MusicLand’s Bad Debt Expense for 2011.

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Desired balance in Allowance for Doubtful

Accounts.

% of Accounts Receivable

$50,000

X 0.05%

= $2,500

AGING OF ACCOUNTS RECEIVABLE METHOD

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Year-end Accounts Receivable is broken down into age classifications.

Year-end Accounts Receivable is broken down into age classifications.

Compute a separate allowance for each age grouping.

Compute a separate allowance for each age grouping.

Each age grouping has a different likelihood of being uncollectible.

MUSICLANDSchedule of Accounts Receivable by Age

31-Dec-11

Days Past Due

Accounts Receivable

Balance Percent

Uncollectible

Estimated Uncollectible

Amount

Not Yet Due 37,000$ 2% 740$ 1 - 30 Days Past Due 6,500 5% 325 31 - 60 Days Past Due 3,500 10% 350 61 - 90 Days Past Due 1,900 25% 475 Over 90 Days Past Due 1,100 40% 440

50,000$ 2,330$

AGING OF ACCOUNTS RECEIVABLE

MusicLand’s unadjusted balance in the allowance account is $200. Per the

previous computation, the desired balance is $2,330.

MusicLand’s unadjusted balance in the allowance account is $200. Per the

previous computation, the desired balance is $2,330.

AGING OF ACCOUNTS RECEIVABLE

Disposition

WRITING OFF A BAD DEBT

With the allowance method, when an account is determined to be uncollectible, the debit is to

Allowance for Doubtful Accounts.

With the allowance method, when an account is determined to be uncollectible, the debit is to

Allowance for Doubtful Accounts.

TechCom determines that Jack Kent’s$520 account is uncollectible.

TechCom determines that Jack Kent’s$520 account is uncollectible.

RECOVERY OF A BAD DEBT

Subsequent collections require that the original write-off entry be reversed

before the cash collection is recorded.

Subsequent collections require that the original write-off entry be reversed

before the cash collection is recorded.

% of Sales% of Sales

Emphasis on Matching

Emphasis on Matching

SalesBad

Debts Exp.

Income Statement

Focus

Income Statement

Focus

% of Receivables% of Receivables

Emphasis on Realizable Value

Emphasis on Realizable Value

Accts. Rec. All. for

Doubtful Accts.

Balance Sheet Focus

Balance Sheet Focus

Aging of Receivables

Aging of Receivables

Emphasis on Realizable Value

Emphasis on Realizable Value

Accts. Rec. All. for

Doubtful Accts.

Balance Sheet Focus

Balance Sheet Focus

Exh. 7.13