1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 8 Accounting for Receivables

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting for Receivables Accounts receivable Accounts receivable Recognition and valuationRecognition and valuation Notes receivable Notes receivable Recognition and dispositionRecognition and disposition Statement presentation and management of receivables Statement presentation and management of receivables PresentationPresentation AnalysisAnalysis Accelerating cash receipts from receivablesAccelerating cash receipts from receivables

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Types of Receivables Amounts due from individuals and other companies Amounts due from individuals and other companies Accounts receivable: Accounts receivable: Amounts owed by customers on accountAmounts owed by customers on account Expected to be collected within 30 daysExpected to be collected within 30 days Notes receivable: Notes receivable: Supported by formal instruments of creditSupported by formal instruments of credit For periods of 30 days or longerFor periods of 30 days or longer Interest bearingInterest bearing

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recognizing Accounts Receivable A receivable is recorded when: A receivable is recorded when: Services are providedServices are provided Merchandise is sold on accountMerchandise is sold on account

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Subsidiary Accounts Receivable Ledger Subsidiary accounts receivable ledger is used to track individual customer accounts Subsidiary accounts receivable ledger is used to track individual customer accounts Each entry is effectively posted twice: Each entry is effectively posted twice: To the subsidiary ledgerTo the subsidiary ledger To the general ledger in summary formTo the general ledger in summary form

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Interest Revenue If a customer does not pay in full within a specified period, financing charges (interest) is added to the balance due If a customer does not pay in full within a specified period, financing charges (interest) is added to the balance due Recognized as interest revenueRecognized as interest revenue

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Nonbank Credit Card Sales Nonbank credit card sales are treated as sales on account Nonbank credit card sales are treated as sales on account Unlike bank credit card sales - treated as cash salesUnlike bank credit card sales - treated as cash sales Receipt of cash from nonbank credit cards is recorded as followsReceipt of cash from nonbank credit cards is recorded as follows

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Valuing Accounts Receivable Some receivables will become uncollectible Some receivables will become uncollectible Not reported as assets if no future benefitNot reported as assets if no future benefit Net realizable value: the collectible amountNet realizable value: the collectible amount Receivables are written down to their collectible amount Receivables are written down to their collectible amount By recording bad debt expenseBy recording bad debt expense In the same period as related revenues are recordedIn the same period as related revenues are recorded

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Allowance Method Three features of allowance method: Three features of allowance method: 1.Amount of uncollectible receivables is estimated and recorded at end of period 2.Actual uncollectibles are written off against the allowance when it is determined the specific account is uncollectible 3.If an account previously written off is recovered the write off is reversed and the collection recorded

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. 1. Recording Estimated Uncollectibles Estimated amount of uncollectible accounts is: Estimated amount of uncollectible accounts is: Debited to an expense account – bad debts expenseDebited to an expense account – bad debts expense Credited to a contra asset account – allowance for doubtful accountsCredited to a contra asset account – allowance for doubtful accounts

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Allowance for Doubtful Accounts Deducted from Accounts Receivable in the current assets section of balance sheet Deducted from Accounts Receivable in the current assets section of balance sheet Net realizable value = Net realizable value = Accounts Receivable − Allowance for Doubtful Accounts Two methods used to estimate allowance: Two methods used to estimate allowance: Percentage of receivables approachPercentage of receivables approach Percentage of sales approachPercentage of sales approach

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Estimating the Allowance: Percentage Receivables Approach Calculates the percentage of receivables that are estimated to be uncollectible Calculates the percentage of receivables that are estimated to be uncollectible Based on past experience and credit policyBased on past experience and credit policy Can be applied to total receivables balance or amounts grouped by age Can be applied to total receivables balance or amounts grouped by age Requires an aging schedule to be preparedRequires an aging schedule to be prepared Better estimate of net realizable value Better estimate of net realizable value Also called the balance sheet method Also called the balance sheet method

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Estimating the Allowance: Percentage of Sales Approach Calculates bad debt expense as a percentage of net credit sales Calculates bad debt expense as a percentage of net credit sales Based on past experience and company’s credit policyBased on past experience and company’s credit policy Example: 2% of credit sales of $1,200,000 = $24,000Example: 2% of credit sales of $1,200,000 = $24,000 Bad debts expense is related to sales in the same period Bad debts expense is related to sales in the same period Also called the income statement method Also called the income statement method

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Comparison of Approaches Income Statement Approach Percentage of Sales Matching Sales Bad Debts Expense Percentage of Receivables Net Realizable Value Allowance for Doubtful Accounts Accounts Receivable Balance Sheet Approach

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. 2. Recording Write-Off of an Uncollectible Account Amount written-off is debited to the allowance account Amount written-off is debited to the allowance account Bad debt expense is not increased Bad debt expense is not increased Expense previously recognized when allowance initially recordedExpense previously recognized when allowance initially recorded

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. 3. Recovery of an Uncollectible Account If cash is collected from a customer after the account has been written off: If cash is collected from a customer after the account has been written off: 1. Reverse write-off entry to restore customer’s account 2. Record collection of the account receivable in the usual way

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Notes Receivable Credit may be granted in exchange for a promissory note: Credit may be granted in exchange for a promissory note: A formal credit instrumentA formal credit instrument A written promise to pay a specified amount of money on demand or at a definite timeA written promise to pay a specified amount of money on demand or at a definite time The party making the promise is the maker The party making the promise is the maker The party to whom payment is made is called the payee The party to whom payment is made is called the payee

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recognizing Notes Receivable If note is received to settle an outstanding account receivable: If note is received to settle an outstanding account receivable: If received for cash, credit is to Cash If received for cash, credit is to Cash Notes are valued at net realizable value Notes are valued at net realizable value Similar process to determine bad debt expense and allowance as for accounts receivableSimilar process to determine bad debt expense and allowance as for accounts receivable

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Recording Interest Formula for calculating interest: Formula for calculating interest: An annual rate of interest An annual rate of interest Separate interest receivable account is used (value of note is not altered) Separate interest receivable account is used (value of note is not altered) Principal Value of Note Principal Value of Note × × = Annual Interest Rate Annual Interest Rate Time in Terms of One Year Time in Terms of One Year Interest

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Disposing of Notes Receivable A note is honoured when paid in full on its maturity date A note is honoured when paid in full on its maturity date Amount due is principal + interestAmount due is principal + interest

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Disposing of Notes Receivable 2 A note is dishonoured if not paid in full at maturity A note is dishonoured if not paid in full at maturity Note is no longer negotiableNote is no longer negotiable Payee still has a valid claim against makerPayee still has a valid claim against maker Balance is transferred to Accounts Receivable in hopes of collectionBalance is transferred to Accounts Receivable in hopes of collection

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Statement Presentation Each major type of receivable is identified on the balance sheet or in the notes Each major type of receivable is identified on the balance sheet or in the notes Generally reported separately in the current or noncurrent sections of the balance sheet Generally reported separately in the current or noncurrent sections of the balance sheet Disclose the net amount of receivables Disclose the net amount of receivables Under IFRS must disclose the gross amount and the allowance for doubtful accountsUnder IFRS must disclose the gross amount and the allowance for doubtful accounts

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Analysis of Receivables Management monitors relationship between sales, receivables and cash Management monitors relationship between sales, receivables and cash Receivables should increase with salesReceivables should increase with sales Unusual increase could signal troubleUnusual increase could signal trouble Receivables ratios: Receivables ratios: Used to help determine if management of receivables is helping or hurting liquidityUsed to help determine if management of receivables is helping or hurting liquidity

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Analysis of Receivables 2 Receivables turnover ratio: = Net Credit Sales ÷ Average Receivables Measures the number of times that receivables are collected in a periodMeasures the number of times that receivables are collected in a period Higher the number, the more liquid are receivablesHigher the number, the more liquid are receivables

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Analysis of Receivables 3 Collection period: = 365 ÷ Receivables Turnover Ratio Calculates the average number of days that accounts receivable are outstandingCalculates the average number of days that accounts receivable are outstanding Operating Cycle: = Days Sales in Inventory + Collection Period Calculates the number of days to complete the operating cycleCalculates the number of days to complete the operating cycle Purchase of inventory through collection of cashPurchase of inventory through collection of cash

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accelerating Cash From Receivables To shorten the cash-to-cash operating cycle To shorten the cash-to-cash operating cycle Loans secured by receivables: Loans secured by receivables: Borrow from bank using receivables as collateralBorrow from bank using receivables as collateral Sale of receivables: Sale of receivables: Factoring: sell receivables to a finance company or bank (called a factor)Factoring: sell receivables to a finance company or bank (called a factor) Securitization: sell receivables to a trust held by many investorsSecuritization: sell receivables to a trust held by many investors

27. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.