1. 13-1 ACCOUNTS RECEIVABLE CHAPTER 13

2. 13-2 Account receivable Sales on credit to customers Account receivable Accounts owned to the company

3. 13-3 Account receivable Credit sales Collection The balance of Accounts receivable account Increase Decrease

4. 13-4 Account receivable Suppose the sale is made for cash… The entry? Cash 1,000 Revenues from Sales 1,000

5. 13-5 Account receivable Suppose the sale is made on credit… The entry? Accounts Receivable 1,000 Revenues from Sales 1,000

6. 13-6 Account receivable When the debt is collected … The entry? Cash 1,000 Account receivable 1,000

7. 13-7 Uncollectible accounts or bad debts The accounts that can’t be collected are called uncollectible accounts or bad debts.

8. 13-8 Uncollectible accounts Under the matching rule, expenses should be matched against with the sales. The uncollectible accounts are incurred in the process of making sales revenues, and they should be recorded as the expenses of the same period of sales.

9. 13-9 Uncollectible accounts Now, let’s look at an example for George Ross Company

10. 13-10 Uncollectible accounts Example Suppose that George Ross Company has $6,000 of accounts receivable for the whole year. At the end of the year, accountants estimate that about $200 of the $6,000 of accounts to be uncollectible. In the next year, the bad debt actually occurs.Thus the uncollectible accounts expense for this year will be $6,000.

11. 13-11 Uncollectible accounts Example Dec. 31 Uncollectible Accounts Expense $200 Allowance for Uncollectible Accounts $200 When bad debts actually occurred Allowance for Uncollectible Accounts $200 Accounts Receivable $200

12. 13-12 Methods used in estimating the allowance 1. Percentage of credit sales method 2. Accounts receivable aging method 3. Percentage of receivables method

13. 13-13 Percentage of credit sales method Method 1 Percentage of credit sales method

14. 13-14 Percentage of credit sales method Percentage is estimated based on actual uncollectible accounts from prior years’ credit sales. A percentage of credit sales for the year are assumed to be uncollectible.

15. 13-15 Percentage of credit sales method Company's experience Ultimate uncollectible accounts average: 2% of credit sales Indicate Expensed 2% of the receivables with an offsetting credit to the reserve for bad-debt At year-end: Adjusting entry

16. 13-16 Percentage of credit sales method What is the effect of this adjusting entry? Decrease in Net Income Decrease in net Accounts Receivable

17. 13-17 Percentage of credit sales method Formula Estimated percentage of uncollectible accounts = (estimated uncollectible accounts/estimated credit sales) * 100%

18. 13-18 Percentage of credit sales method Example Now, let’s look at an example … Orient Construction Materials Company had total credit sales of $6,000,000 during 2006. In the past, the percentage of bad debts is 2.5%.

19. 13-19 Percentage of credit sales method Example The journal entry on December 31 ? December 31 Uncollectible Accounts Expense $150,000 Allowance for Uncollectible Accounts $150,000

20. 13-20 Method 2 A ccounts receivable aging method The Aging of Receivables method

21. 13-21 A ccounts receivable aging method The longer a receivable is outstanding, the less likely it is to be collected. The Aging of Receivables method considers the age and amount of the ending Accounts Receivable balance.

22. 13-22 A ccounts receivable aging method The estimated uncollectible Amounts in each category are totaled to determine the total allowance. Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.

23. 13-23 A ccounts receivable aging method Example Now, let’s look at an example for Orient Company … Suppose that Orient Company had $600,000 of accounts receivable during 2006: A--$100,000; B-- $150,000; C--$200,000; D-- $150,000.

24. 13-24 A ccounts receivable aging method Example Orient Company Analysis of Accounts Receivable by Age December 31, 2006 ItemAccount Balance Not yet due Past due 0-30days31-60days61- 120days Over 120days A $100,000$50,000 B $150,000$100,000$50,000 C $200,000$50,000 D $150,000$50,000$100,000 Total $600,000$200,000$150,000$50,000 $100,000 Uncollectibility percentage1%3%5%6%20% Estimated $32,000$2,000$4,500$2,500$3,000$20,000

25. 13-25 A ccounts receivable aging method Example The journal entry on December 31 ? December 31 Uncollectible Accounts Expense $32,000 Allowance for Uncollectible Accounts $32,000

26. 13-26 P ercentage of receivables method Method Percentage of receivables method 3

27. 13-27 P ercentage of receivables method Focus: determining the desired balance in the Allowance for Uncollectible Accounts on the Balance Sheet This method uses a percentage of the ending accounts receivable balance to estimate the allowance for uncollectible accounts.

28. 13-28 P ercentage of receivables method Year-End Accounts Receivable x Bad Debt % Compute the estimate of the Allowance for Doubtful Accounts

29. 13-29 Compute the estimate of the Allowance for doubtful Accounts P ercentage of receivables method

30. 13-30 P ercentage of receivables method Example Now, let’s look at an example for Orient Co.

31. 13-31 P ercentage of receivables method Example At the end of 2006, Orient Co.’s accounts receivable are $600,000 and the allowance account had a credit balance of $2,000. In the past, Orient’s percentage of uncollectible accounts is 2%.

32. 13-32 P ercentage of receivables method Example The journal entry on December 31 ? December 31 Uncollectible Accounts Expense $10,000 Allowance for Uncollectible Accounts $10,000

33. 13-33 WE ARE SAILING RIGHT ALONG!!