1. RECEIVABLES & SALES
CHAPTER
FIVE

2. Homework P1 - Sales Discounts P2 – Sales Allowance
P3 – Allowance Method of Uncollectibles
P4 – Write Off Uncollectibles
P8 – Notes Receivable

3. Credit Sales and discounts
Contra Revenues
Allowance methods
Write Off A/R
Aging A/R
Direct W/O
Receivable Analysis
Notes Receivable
Percentage of Sales Method- Allowance

4. Accounts Receivable transactions
Credit Sales
Accounts Receivable (Amount of invoice)
Sales
Freight-out
Receive Payment
Cash
A/R

5. Contra Revenue Accounts
Sales Discount
Sales Returns
Sales Allowances

6. DISCOUNTS TRADE DISCOUNTS SALES DISCOUNTS (pg 285)
a reduction in the selling price of the item as a reward for buying large quantities.
SALES DISCOUNTS (pg 285)
a reduction in the amount the customer needs to pay as a reward for paying earlier than required

7. TERMS
2/10 Net 30
2% if paid in 10 days, full amount in 30 days
1/15 Net 60

8. Sales Discount Transaction
Credit Sales – no discount until paid
A/R 500
Sales 500
Payment – Discount is recorded when paid
Cash 490
Sales Discount(2%) 10
A/R
(take it out for the amount you put it in)

9. Sales Discount exercises
Do E5-3, 5-4 page 246

10. Sales Returns & Allowance
If it doesn’t work or your customer doesn’t want it, it can returned and the customer will get their money back
SALES ALLOWANCE
If you give a reduction in the price of the item you sold and they keep the item.

11. Sales Returns & Allow transaction
Credit Sale
A/R
Sales 1000
Return
Sales Return and Allowance 300
A/R
Customer Payment
Cash 700
A/R 700

12. NET SALES SALES 1500 -- Sales Returns & Allowances 300
-- Sales Discount
NET SALES

13. Sales Return and Allowance
Exercise 5-6 page 247

14. Bad Debt (Uncollectible)
When a customer cannot or will not pay the invoice.
Four methods:
Direct Write off Method
Allowance Methods:
Percentage of Receivables
Aged A/R
Percentage of Sales

15. Direct Write off Method
Use when you have only a few uncollectible invoices and it occurs infrequently.
Transaction:
Bad Debt Expense
A/R

16. ALLOWANCE ACCOUNT
Set aside of costs that will not occur until the next period but revenue is recorded in current year.
Use when you have several customers who do not pay you and it happens frequently during the same year.

17. Can’t charge A/R because we don’t know which one will be uncollectible
Fraud Alert or Income Manipulating
If overstate the uncollectible –understate income and income tax
Do not have to worry until the next year.
If audited will need to provide an aged A/R to prove your uncollectible A/C expense

18. Accounts used Uncollectible Account Expense
or BAD DEBT Expense
Always a debit balance account
Non- Cash transaction
Allowance for uncollectible – Contra Asset Account
Should be a credit balance

19. Setting up or adjusting entry - 2009
Bad Debt Expense
Uncollectible Account Expense
Effects Net Income
Writing off bad A/R in 2010
Uncollectible Account Expense
A/R
Does not effect net income

20. Allowance t-account ___________________________________
Write off A/R | Setting up or adding to | | |
Balance
Wrote off less than estimated

21. ___________________________________
Write off A/R | Setting up or adding to | | |
Balance
Wrote off more than estimated

22. Less Allow.for Uncollectible Accts = Net Receivables
Accounts Receivable
Less Allow.for Uncollectible Accts
= Net Receivables
(Net realizable value)
Exercise 5-7 pg 247

23. Exercise 5-13 page 248
Compare allowance method with the direct write off method and the effect on income tax.

24. Aging Method More accurate Use if you do not have historical data
It is the balance in the allowance account – not the adjusting entry
See page 228 for Aging schedule
Exercise 5-11 page 248

25. Percentage of Sales Percentage of A/R --- Balance Sheet Method
Good because it is closest to net realized value
Most accepted method
Percentage of Credit Sales – Income Statement Method
Good because better matched with revenue
Only accepted if the amounts do not differ significantly from Percentage of Receivables
Exercise E5-19 page 249

26. Receivable Analysis Receivables turnover ratio
Good to get when you first start the job or higher a new person.
Later show how you have helped to improve A/R collections
Receivables turnover ratio
Average collection period

27. Receivables turnover ratio -- # of times during the year the Avg A/R is collected or turned over
Net Credit Sales
Avg A/R
Higher the number of times, the better.
Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R

28. Average collection period -- # of days A/R balance is outstanding or how long did it take to collect A/R
Your Invoice terms are used to see if good or bad
If Net 30 is terms you days should be around 30.
365
A/R Turnover
Exercise E5-14 page 249

29. NOTES RECEIVABLE
More formal and legally bound form of credit sales. Usually a note is a loan that is signed and has an interest component .

30. Note Terminology Face Value – Principle of the note
Due date- date it is to be paid back (DUH!!!)
Payee – who is to receive the money
Maker – who is to pay the money
Interest rate- rate is in annual terms.

31. Note Transactions A note for an accounts receivable Seller Buyer
Notes Receivable (N/R) A/P
A/R Notes Payable (N/P)
Note is paid
Cash N/P
Interest Income Interest Expense
N/R Cash

32. Interest Calculations
I=PRT
Interest = Principle X rate X time
Rate
12% = 1% month
6% = .5% month
18%= 1.5% month
24% = 2% month
Principle is $10,000 rate is 12% time is 2 months the interest is: X 1% X 2 = $200
Exercise pg 249

33. Interest Receivable Adjust Entry
Interest earned but not yet paid - ACCRUAL
Adjusting Journal Entry – for the month of the year
Interest Receivable
Interest Income
When note is paid
Cash
N/R
Exercise 5-18 page 249