1. Chapter 8

2. Define and explain common types of receivables

3.  Arise from selling goods and services on credit and lending money  Right to receive cash in the future from a current transaction  An asset  Two major types ◦ Accounts receivable ◦ Notes receivable 3Copyright (c) 2009 Prentice Hall. All rights reserved.

4.  Amounts to be collected from customers for sales on credit  Serves as a control account ◦ Summarizes total of all individual customer receivables  Customer ledger ◦ Subsidiary ledger showing each customer’s balance Copyright (c) 2009 Prentice Hall. All rights reserved.4

5.  More formal than accounts receivable  Usually longer in term ◦ Debtor promises to pay by maturity date  Charge interest to the borrower  Promissory note ◦ Written document signed by both parties Copyright (c) 2009 Prentice Hall. All rights reserved.5

6. Design internal controls for receivables

7.  Credit department evaluates customers’ applications  Separation of duties ◦ Credit department should not handle cash ◦ Cash handlers should not extend credit 7 Copyright (c) 2009 Prentice Hall. All rights reserved.

8.  Selling on credit: ◦ BENEFIT – Increase sales by selling to a wider range of customers ◦ COST – Some customers don’t pay  Results in Uncollectible-account expense  Two methods to account for uncollectible accounts ◦ Allowance method ◦ Direct write-off method Copyright (c) 2009 Prentice Hall. All rights reserved.8

9. Use the allowance method to account for uncollectibles

10.  Based on the matching principle ◦ Record uncollectible accounts expense in same period as sale ◦ Expense is estimated from past experience  Offset to expense is Allowance for uncollectible accounts ◦ A contra asset, contra to Accounts receivable Copyright (c) 2009 Prentice Hall. All rights reserved.10

11.  Percent-of-Sales ◦ Income-Statement Approach ◦ Estimates uncollectible accounts as a percent of sales  Aging-of-Accounts- Receivable ◦ Balance-Sheet Approach ◦ Determine target Allowance based on age of actual receivables Copyright (c) 2009 Prentice Hall. All rights reserved.11

12. 12 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Uncollectible accounts expense Allowance for uncollectible accounts To estimate bad debts for period Operating expense Contra-asset account Copyright (c) 2009 Prentice Hall. All rights reserved.

13. 13 Credit sales % uncollectible Uncollectible account expense

14. Copyright (c) 2009 Prentice Hall. All rights reserved.14 Adjust Allowance for uncollectible accounts to Aging schedule Uncollectible accounts expense is the difference between the target Allowance balance based on the aging schedule and the current Allowance account balance

15. Copyright (c) 2009 Prentice Hall. All rights reserved.15 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Dec31Uncollectible account expense210 Allowance for uncollectible accounts210 0-60 DaysOver 60 daysTotal $71,000$6,000$77,000 x 1% x 20% $710$1,200$1,910 Allowance for uncollectible accts $1,700 Adjustment needed $210

16. Copyright (c) 2009 Prentice Hall. All rights reserved.16 Allowance for uncollectible accounts $ 1,700 $ 210 $1,910 Adjusting entry Aging schedule

17.  When a specific customer account is identified as uncollectible, it is written off  Entry: Copyright (c) 2009 Prentice Hall. All rights reserved.17 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Allowance for uncollectible accounts Accounts receivable-name

18.  Sometimes a customer will pay the amount owed after the customer’s account is written off  Two entries needed Copyright (c) 2009 Prentice Hall. All rights reserved.18 GENERAL JOURNAL DATE DESCRIPTIONREFDEBITCREDIT Accounts receivable-name Allowance for uncoll. accounts Cash Accounts receivable-name Reverses write off Records payment

19. Increases (debits)  Sales on credit Decreases (credits)  Customer payments  Write-offs Copyright (c) 2009 Prentice Hall. All rights reserved.19

20. Decreases (debits)  Write-offs Increases (credits)  Uncollectible-account expense entry  Recoveries of accounts previously written off Copyright (c) 2009 Prentice Hall. All rights reserved.20

21. Understand the direct write-off method for uncollectibles

22.  Used by small businesses  No Allowance for uncollectible accounts  Records Uncollectible-accounts expense when specific account is written off Copyright (c) 2009 Prentice Hall. All rights reserved.22 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Uncollectible account expense Accounts receivable-name Write off account using direct write off method

23.  Overstates Accounts receivable on the balance sheet ◦ No Allowance account  Violates matching principle ◦ Uncollectible-account expense often not in same period as sale Copyright (c) 2009 Prentice Hall. All rights reserved.23

24. Report receivables on the balance sheet

25.  Current asset  Shown net of Allowance for uncollectible accounts  Two presentation styles: Copyright (c) 2009 Prentice Hall. All rights reserved.25 Balance Sheet (Partial) December 31, 2012 Assets Current assets: Accounts receivable, net of allowance for doubtful accounts of $$$$$$$$

26. Journalize credit-card, bankcard, and debit-card sales

27.  Credit card companies (American Express and Discover) pay the retailer and bill the customer  Credit card company charges a fee to the retailer ◦ 1 – 5% Copyright (c) 2009 Prentice Hall. All rights reserved.27 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Accounts receivable – Discover Credit-card discount expense Sales revenue

28.  Retailers receive cash at time of sale  VISA and MasterCard most common bank cards  Charge retailer a fee Copyright (c) 2009 Prentice Hall. All rights reserved.28 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Cash Bankcard discount expense Sales revenue

29.  Different than credit and bankcards  Same as cash ◦ Amount subtracted from buyer’s bank account ◦ Amount added to retailer’s bank account Copyright (c) 2009 Prentice Hall. All rights reserved.29

30. Account for notes receivable

31.  More formal than Accounts receivable  Debtor signs promissory note ◦ A written promise to pay a specified amount of money at a particular future date 31Copyright (c) 2009 Prentice Hall. All rights reserved.

32. 32 PROMISSORY NOTE ______________ _____________ Amount Date For value received, I promise to pay to the order of First National Bank __________________________________ Dollars on ______________________________ plus interest at the annual rate of 12%. ________________________ PROMISSORY NOTE ______________ _____________ Amount Date For value received, I promise to pay to the order of First National Bank __________________________________ Dollars on ______________________________ plus interest at the annual rate of 12%. ________________________ $10,000.00 Ten thousand and no/100--------------------- Oct. 4, 2010 January 2, 2011 Jeanette Sims Interest Starts Maker Maturity Date Interest Rate Copyright (c) 2009 Prentice Hall. All rights reserved. Payee Principal

33.  Maturity date can be: ◦ A specific date, such as March 13 ◦ Stated in terms of number of months  A three month note signed on March 13 would be due on June 13 ◦ Stated in terms of number of days  Must count days from issue date to maturity day  Example on following slide 33Copyright (c) 2009 Prentice Hall. All rights reserved.

34. A 90-day note issued March 13 34Copyright (c) 2009 Prentice Hall. All rights reserved. Days in note90 Days in March31 Date of issue-13 Days outstanding in March-18 Days remaining72 Days in April30 Days in May31-61 Due date in June11

35. 35Copyright (c) 2009 Prentice Hall. All rights reserved. Amount of note Annual interest rate # of months 12 # of months 12 # of days 360 # of days 360 OR

36.  If any notes receivable are outstanding at the end of the period, interest must be accrued  Interest is earned over time  Revenue must be recorded in the period earned Copyright (c) 2009 Prentice Hall. All rights reserved.36

37. 37 Date of Note, Aug 1, 2011 End of Fiscal Year, Dec 31, 2011 Maturity Date, May 1, 2012 Copyright (c) 2009 Prentice Hall. All rights reserved. Note term = 9 months 5 months 4 months

38. 38 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2011 Jan3Cash101,920 Bankcard discount expense2,080 Sales revenue104,000 Oct1Notes receivable24,000 Cash24,000 Dec31Interest receivable600 Interest revenue600 (24,000 x 10% x 3/12) Copyright (c) 2009 Prentice Hall. All rights reserved.

39. 39 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2012 Oct1Cash26,400 Interest receivable600 Interest revenue1,800 Notes receivable24,000 Interest revenue = 24,000 x.10 x 9/12 Copyright (c) 2009 Prentice Hall. All rights reserved.

40.  If the maker does not pay the note on the due date, the note is dishonored  The note is expired, but the maker still owes the company for the maturity value  An entry is made to convert the note into an account receivable Copyright (c) 2009 Prentice Hall. All rights reserved.40 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Accounts receivable-name Notes receivable-name Interest revenue

41. Use the acid-test ratio and days’ sales in receivables to evaluate a company

42.  Also called the “quick ratio”  Stringent measure of liquidity  Measures entity’s ability to pay its current liabilities immediately 42Copyright (c) 2009 Prentice Hall. All rights reserved.

43.  Also called “collection period”  Indicates the number of days it takes to collect the average balance of receivables  The shorter the collection period, the more quickly cash is available. 43Copyright (c) 2009 Prentice Hall. All rights reserved.

44. 44 One day’s sales = Net sales ÷ 365 days Days’ sales in average accounts receivable = Average net accounts receivable ÷ One day’s sales Copyright (c) 2009 Prentice Hall. All rights reserved.