Chapter 8 Receivables Accounting, 21st Edition Warren Reeve Fess © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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After studying this chapter, you should be able to: Objectives 1. List the common classifications of receivables. 2. Summarize and provide examples of internal control procedures that apply to receivables. 3. Describe the nature of and the accounting for uncollectible receivables. 4. Journalize the entries for the allowance method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables. After studying this chapter, you should be able to:

Objectives 5. Journalize the entries for the direct write-off of uncollectible receivables. 6. Describe the nature and characteristics of promissory notes. 7. Journalize the entries for notes receivable transactions. 8. Prepare the Current Assets presentation of receivables on the balance sheet. 9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables.

Classification of Receivables Accounts Receivable—used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period. Notes Receivable—used to grant credit on the basis of a formal instrument of credit, called a promissory note. Other Receivables—include interest receivable, taxes receivable, and receivables from officers and employees.

Separating the Receivable Functions Customer Credit Info. Credit Approval Collections Sales Acctg. Info Goods or services Invoice Acctg. Info. Accounting

Uncollectible Receivables Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.

Uncollectible Receivables The Allowance Method This method is consistent with the matching principle. Management makes an estimate each year of the portion of accounts receivable that may not be collectible. Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited. Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.

The Allowance Method On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Adjusting Entry Dec. 31 Uncollectible Accounts Expense 4 000 00 Allowance for Doubtful Accounts 4 000 00

The Direct Write-Off Method May 10 Uncollectible Accounts Expense 420 00 Accounts Receivable—D. L. Ross 420 00 To write off an uncollectible account. On May 10, D. L. Ross’ account was determined to be uncollectible. The $420 balance is written off the books.

The Direct Write-Off Method Nov. 1 Accounts Receivable—D. L. Ross 420 00 Uncollectible Accounts Expense 420 00 To reinstate account written off on May 10. 1st Entry In November, D. L. Ross remits a check for $420 in payment of his account.

A second entry is needed to record receipt of the cash. The Direct Write-Off Method Nov. 1 Cash 420 00 Accounts Receivable—D. L. Ross 420 00 To record collection on account. 2nd Entry A second entry is needed to record receipt of the cash.

Notes Receivable Payee Maker H. B. Lane $_____________ 2,500.00 Fresno, California______________20___ March 16 06 ________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We THE ORDER OF ____________________________________________ Judson Company Two thousand five hundred 00/100--------------------------- _________________________________________________DOLLARS Maker PAYABLE AT ______________________________________________ City National Bank VALUE RECEIVED WITH INTEREST AT ____ 10% NO. _______ DUE___________________ 14 June 14, 2006 H. B. Lane TREASURER, WILLIARD COMPANY

Notes Receivable A promissory note is a written document containing a promise to pay: a specific amount of money (principal) to a specific person or company (payee) at a specific place on a specific date or upon demand plus interest at a specific percentage of the principal (face) amount per year

Let’s determine the due date for a 90-day note dated March 16. Notes Receivable Let’s determine the due date for a 90-day note dated March 16. The date a note is to be paid is called the due date. It is also referred to as the maturity date.