Accounts Accounts Receivable ReceivableReview Review BE 8-2, p 427 8-1 REPORTING AND ANALYZING RECEIVABLES 8-2 Accounting, Fifth Edition 8 Learning Learning Objectives Objectives After studying this chapter, you should be able to: 1. Identify the different types of receivables.
2. Accounts Receivable accounting issues: a) Explain how accounts receivable are recognized. b) Describe & compute the allowance methods for accounts receivable. c) Write off of Accounts Receivable d) Recovery of Accounts Receivable 3. Describe the principles of sound accounts receivable management (Steps 1-5). 4. Explain the statement presentation of receivables. 5. Compute the interest on notes receivable. * Self-study 8-3
Types Typesof of Receivables Receivables Amounts due from individuals and companies that are expected to be collected in cash. Amounts customers owe on account that result from the sale of goods and services. Written promise (formal instrument) for amount to be received. Also called trade receivables. Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes refundable.
Accounts Accounts Receivable Receivable Notes Notes Receivable Receivable Other Other Receivables Receivables 8-4 LO 1 Identify the different types of receivables. Accounts AccountsReceivable Receivable Two accounting issues: 1. Recognizing accounts receivable.
Service organization records a receivable when it performs services without immediate payment. Merchandiser records a receivable when merchandise is sold without immediate payment. 2. Valuing accounts receivable. 8-5 LO 2 Explain how accounts receivable are recognized in the accounts. Recognizing Recognizing Receivables Receivables Sales Sales on onAccount Account Illustration: Assume that Jordache Co. on July 1, 2014, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co. Jul. 1 Accounts receivable 1,000
Sales revenue 1,000 8-6 LO 2 Explain how accounts receivable are recognized in the accounts. REVIEW: REVIEW: Recognizing Recognizing Receivables Receivables Sales SalesReturn Return&&Payment Payment on on Receivables Receivables Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co. Jul. 5 Sales returns and allowances 100
Accounts receivable 100 Illustration: On July 11, Jordache receives payment from Polo Company for the balance due. Jul. 11 Cash Sales discounts ($900 x .02) 882 18 Accounts receivable 900 8-7 LO 2 Explain how accounts receivable are recognized in the accounts. Valuing ValuingAccounts AccountsReceivable Receivable Uncollectible Accounts Receivable Sales on account raise the possibility of
accounts not being collected. Seller records losses that result from extending uncollectible credit as Bad Debts Expense. Allowance for Doubtful Accounts is a contraasset account used to track the monies set aside for bad debts. The net amount considered collectible (valuation) is called Net Realizable Value (A/R Allow for Doubtful Accts) 8-8 LO 3 Describe the methods used to account for bad debts. Valuing ValuingAccounts AccountsReceivable Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: Allowance Method Losses are estimated:
No matching. Better matching. Receivable not stated at net realizable value. Receivable stated at net realizable value. Not acceptable for financial reporting.
Required by GAAP. Not GAAP 8-9 LO 3 Describe the methods used to account for bad debts. Selling Sellingon onAccounts AccountsReceivable Receivable Journal entry for credit sale of $100? Accounts receivable Sales 100 100 Accounts Receivable (A) + Beg. 39,800
Allowance for Doubtful Accounts (CA) + 528 Beg. 100 End. 39,900 8-10 528 End. Recording Recording Receipts Receipts on onAccounts Accounts Receivable Receivable Collected $300 on account? Cash 300
End. Coll. Valuing ValuingAccounts AccountsReceivable Receivable Estimating the Allowance Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Helpful Hint Where appropriate, the percentage-ofreceivables basis may use only a single percentage rate. 8-12
LO 3 Describe the methods used to account for bad debts. Valuing ValuingAccounts AccountsReceivable Receivable Aging the accounts receivable - customer balances are classified by the length of time they have been unpaid. Illustration 8-7 8-13 LO 3 Describe the methods used to account for bad debts. Valuing ValuingAccounts AccountsReceivable Receivable Estimating the Allowance Illustration: Assume the unadjusted trial balance shows Allowance for Doubtful Accounts with a credit balance of $528. Prepare the adjusting entry assuming $2,228 is the estimate of uncollectible receivables from the aging schedule. Dec. 31
Bad debt expense Allowance for doubtful accounts 1,700 1,700 Illustration 8-8 Bad debts accounts after posting 8-14 LO 3 Describe the methods used to account for bad debts. Allowance Allowance Method Method for for Uncollectible UncollectibleAccounts Accounts Allowance Method for Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. To set aside reserves for uncollectible accounts: Bad Debts Expense
$xxx Allowance for Doubtful Accounts $xxx (a contra-asset account). 3. When a SPECIFIC account is determined uncollectible and written off: Allowance for Doubtful Accounts Accounts Receivable $xxx $xxx Allowance for Doubtful Accounts (CA) - + 2. 3.
1. 8-15 LO 3 Describe the methods used to account for bad debts. Adjusting AdjustingAllowance Allowance for for Doubtful DoubtfulAccounts Accounts Adjustment of $1700 for estimated bad debts when guesstimating uncollectible accounts. Bad debt expense 1,700 Allowance for Doubtful Accounts Accounts Receivable (A) + Beg. 39,800 Sale 100 End. 39,600
8-16 1,700 Allowance for Doubtful Accounts (CA) + 528 300 Coll. 1,700 Beg. Est. 2,228 End. It is estimated that $2,228 of the $39,600 in A/R will never be collected. Practice PracticeProblem
Problem Estimated EstimatedAllowance Allowance E8-6, p 430 (part 1) Create T accounts for Accounts Receivable & Allowance for Doubtful Accounts. Place the + and on the correct side. Input the opening balances. Calculate the estimated Allowance for Doubtful Accounts. Input this amount into the T account as needed. Create the journal entry to make the T-account in the step above balance. 8-17 Write Writeoff off of ofAccounts Accounts Receivable Receivable Write-off of uncollectible accounts for $600 when confirmation of a R.A. Wares account is uncollectible. Allowance for Doubtful accounts
Coll. 600 W/O 1,700 Est. W/O 600 1,628 End. Valuing ValuingAccounts AccountsReceivable Receivable Recovery of an Uncollectible Account Illustration: On July 1, R. A. Ware pays the $600 amount that Hampson Furniture had written off on March 1. Hampson makes these entries: July 1 Accounts receivable
600 Allowance for doubtful accounts 1 Cash 600 600 Accounts receivable 600 Helpful Hint Like the write-off, a recovery does not involve the income statement. 8-19 LO 3 Describe the methods used to account for bad debts. Recovery Recoveryof ofAccounts Accounts Receivable Receivable R.A. Ware later decides to pay off their account.
600 W/O Allowance for Doubtful Accounts (CA) + 528 Beg. W/O 600 1,700 Est. 600 Recovery 600 Receipt End. 39,000 8-20 2,228 End. Practice Practice Problem Problem Write Write off
off & & Recovery Recovery E8-6, parts 2 & 3, pg 430 Continue using the T-accounts you previously set up. Write-off the $1,000 that has been confirmed to be uncollectible. Lo and behold, the $1,000 that was determined uncollectible will now be paid. a) Bring the account back onto the books (clue: undo what you did in Step 2. b) Record the receipt of cash and reduction in accounts receivable for the $1,000. 8-21 Managing ManagingReceivables Receivables Illustration 8-16 Excerpt from Sketchers note on concentration of credit risk 8-22
LO 7 Describe the principles of sound accounts receivable management. Managing ManagingReceivables Receivables Managing accounts receivable involves five steps: Illustration 8-19 Managing receivables 8-23 LO 9 Describe methods to accelerate the receipt of cash from receivables. Step Step11-- Managing Managing Receivables Receivables Extending Credit 8-24
If the credit policy is too tight, you will lose sales. If the credit policy is too loose, you may sell to customer who will pay either very late or not at all. It is important to check references on potential new customers as well as periodically to check the financial health of continuing customers. LO 7 Describe the principles of sound accounts receivable management. Step Step22-- Managing Managing Receivables Receivables Establishing a Payment Period 8-25
Companies should determine a required payment period and communicate that policy to their customers. The payment period should be consistent with that of competitors. LO 7 Describe the principles of sound accounts receivable management. Managing ManagingReceivables Receivables Step Step33 Monitoring Collections 8-26 Companies should prepare an accounts receivable aging schedule at least monthly.
Helps managers estimate the timing of future cash inflows. Provides information about the collection experience of the company and identifies problem accounts. Significant concentrations of credit risk must be discussed in the notes to its financial statements. LO 7 Describe the principles of sound accounts receivable management. Step Step44-- Managing Managing Receivables Receivables Evaluating Liquidity of Receivables Accounts Receivable Turnover: Assess the liquidity of the receivables.
Measure the number of times, on average, a company collects receivables during the period. Average collection period: 8-27 Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period. LO 8 Identify ratios to analyze a companys receivables. Step Step44-- Financial Financial Statement Statement Presentation Presentation
Evaluating Liquidity of Receivables 8-28 Illustration 8-17 Data from Nike (in millions) LO 8 Identify ratios to analyze a companys receivables. Step Step55-- Managing Managing Receivables Receivables Accelerating Cash Receipts 1) Accept credit cards 2) Sell accounts receivables for an amount less than the amount owed from its customers Cash Service charge expense Accounts receivable
8-29 588,000 12,000 600,000 LO 9 Describe methods to accelerate the receipt of cash from receivables. Step Step5: 5: Credit Credit Card CardSales Sales Accepting credit cards are helpful to retailers because: 1. Helps to increase sales. 2. Credit risk is transferred to the credit card issuer. 3. The retailer avoids having to evaluate a customers credit standing for each sale; this responsibility is transferred to the credit card issuer. Three parties involved when credit cards are used. 1. credit card issuer, 2. Retailer (who pays 2-4% to the credit card issuer), 3. customer.
8-30 LO 9 Describe methods to accelerate the receipt of cash from receivables. Credit Credit Card CardSales Saleson onStore StoreCards Cards Illustration: Some retailers issue their own credit cards. Assume that you use your JCPenney Company credit card to purchase clothing with a sales price of $300. Accounts receivable 300 Sales revenue 300 Assuming that you owe $300 at the end of the month, and JCPenney charges 1.5% per month on the balance due Accounts receivable
4.50 Interest revenue 4.50 8-31 LO 2 Explain how accounts receivable are recognized in the accounts. Credit Credit Card CardSales Saleson onVisa/MasterCard Visa/MasterCard National Credit Card Sales Illustration: Morgan Marie purchases $1,000 of compact discs for her restaurant from Sondgeroth Music Co., and she charges this amount on her Visa First Bank Card. The service fee that First Bank charges Sondgeroth Music is 3%. Cash Service charge expense Sales revenue 8-32
970 30 1,000 LO 9 Describe methods to accelerate the receipt of cash from receivables. Financial Financial Statement Statement Presentation Presentation Illustration 8-14 Balance sheet presentation of receivables 8-33 LO 6 Explain the statement presentation of receivables. Valuing ValuingAccounts AccountsReceivable Receivable Illustration 8-9 Sketchers USAs note disclosure of accounts receivable
8-34 LO 3 Describe the methods used to account for bad debts. Valuing ValuingAccounts AccountsReceivable Receivable Estimating the Allowance 8-35 Illustration 8-6 Nikes allowance method disclosure LO 3 Describe the methods used to account for bad debts. Notes NotesReceivable Receivable To the payee (Wilma Company), the promissory note is a note receivable. Nov 1
Notes receivable 10,000 Accounts receivable 10,000 To the maker (Brent Company), the promissory note is a note payable. 8-36 Illustration 8-10 LO 4 Compute the interest on notes receivable. Notes NotesReceivable Receivable Illustration: Wolder Co. lends $10,000 on June 1, accepting a fivemonth, 9% interest note. If the note is paid on November 1, the maturity date, the entry to record the collection is: Nov. 1 Cash Notes receivable Interest revenue
10,375 10,000 375 ($10,000 x 9% x 5/12 = $375)* *Computing Interest Illustration 8-11 8-37 LO 4 Compute the interest on notes receivable. Notes NotesReceivable Receivable Computing Interest Examples 8-38 Illustration 8-12 LO 4 Compute the interest on notes receivable.
Notes NotesReceivable Receivable Accrual of Interest Receivable Illustration: Suppose instead that Wolder Co. prepares financial statements as of September 30. The adjusting entry by Wolder is for four months ending Sept. 30. Illustration 8-13 Sept. 30 Interest receivable Interest revenue 300 300 ($10,000 x 9% x 4/12 = $ 300) 8-39 LO 5 Describe the entries to record the disposition of notes receivable.
Notes NotesReceivable Receivable Accrual of Interest Illustration: Prepare the entry Wolders would make to record the honoring of the note on November 1. Nov. 1 Cash Notes receivable Interest receivable Interest revenue 10,375 10,000 300 75 (10,000 x 9% x 1/12 = $75) 8-40 LO 5 Describe the entries to record the disposition of notes receivable.
Practice PracticeProblem ProblemNotes NotesReceivable Receivable E8-8, p 431 Record the Note Receivable (N/R). Note: CR Cash Calculate the accrued interest income as of Dec 31. Remember that the N/R originated on May 1. Record the journal entry. Record the cash received on May 31, 2014. Be sure to include the information in Step 2 in the journal entry. 8-41
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