Types of Receivables Amounts due from individuals and other companies that are expected to be collected in cash. Amounts due from customers resulting from sale of goods and services. Claims for which formal instruments of credit are issued as proof of debt. “Nontrade” receivables (loans to officers, advances to employees, and income taxes). Accounts Receivable Notes Receivable Other Receivables

Accounts Receivable Three accounting issues: Recognizing accounts receivable. Service org - records receivable when it provides service. Merchandiser - records receivable when sale is made. Manufacturer - records receivable when mdse is shipped. 2. Valuing accounts receivable. 3. Disposing or Collecting of accts recble.

Accounts Receivable Accounts Receivable 1,000 Sales Revenue 1,000 Ex: 7/01/16 … You sell mdse on account to Customer for $1,000 terms 2/10, n/30. Your journal entry is: Jul. 1 Accounts Receivable 1,000 Sales Revenue 1,000

Accounts Receivable Sales Returns and Allowances 100 Ex: 7/05/16 … Customer returns mdse worth $100 to you. Jul. 5 Sales Returns and Allowances 100 Accounts Receivable 100 Ex: 7/11/16 … You receive payment from Customer. Jul. 11 Cash 882 Sales discounts ($900 x .02) 18 Accounts receivable 900

Accounts Receivable Valuing Accounts Receivable Bad Debts Expense. Current asset. Valuation (net realizable value). Will you “realize” 100% of your accounts receivable (Will all of your credit accounts be collected?) Uncollectible Accounts Receivable You (the seller) incurs a loss by extending credit. Bad Debts Expense.

Accounts Receivable Financial Statement must show Accounts Receivable at “Net Realizable Value” (the amount that is expected to turn to cash).

Problem ? Board Demo: Explain: Control Account vs Subsidiary Ledger Jan 1 … Assume Bob sells $100 (ea) to 20 students. (Sales revenue = 20 x $100 = $2,000) Feb 1 … Assume 19 students paid in full within 30 days. (Cash received = $1,900) May 1 … Assume 1 student “drops” and will never pay the $100 owed. (Bad debt expense = $100). Problem ? GAAP requires matching expenses to revenues. Sales (revenue) was in JAN while this expense is in MAY.

MAY Accounts Receivable 100 Bad Debt Expense 100 MAY 1 … Student “dropped” owing $100 … Write-off the “bad” account. MAY 100 Bad Debt Expense 100 Accts Recbl (“dropped” student name) Sales Accounts Receivable 2,000 JAN JAN 2,000 1,900 FEB 100 MAY Bad Debt Expense MAY 100

Methods of Accounting for Uncollectible Accounts Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off No matching. Receivable not stated at cash realizable value. Not acceptable for GAAP.

“Direct Write Off” Method Bad Debt Expense 100 100 Accts Recbl (“dropped” student name) Accounts Receivable Bad Debt Expense 100 100

Methods of Accounting for Uncollectible Accounts Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off No matching. Receivable not stated at cash realizable value. Not acceptable for GAAP. Allowance Method Losses are estimated: Better matching. Receivable stated at cash realizable value. Required by GAAP.

Accounts Receivable JAN … You sell $100 to 100 customers on credit = $10,000. Based on your company’s credit & collection experience, 95% will eventually pay, 5% will be uncollectible. JAN … Prepare entry to “allow” for uncollectible accounts (bad debt expense) from JAN credit sales. 500 Bad Debt Expense Allowance for Doubtful Accts Bad Debt Expense xxx Accts Recbl (Specific Name of Customer)

Allowance for Uncollectible Accounts Receivable Allowance for Uncollectible 500 Bad Debt Expense JAN … Entry to “allow” for (bad debt expense) from JAN credit sales. Balance Sheet Info Income Statement Info Accounts Receivable Sales JAN 10,000 10,000 JAN Allowance for Uncollectible Bad Debt Expense 500 JAN JAN 500

Allowance for Uncollectible Accounts Receivable MAR … You just found out that one of your customer (who owes you $100 from last JAN) declared bankruptcy. Write-off that account. MAR 100 Allowance for Uncollectible Accounts 100 Accts Recbl (the bankrupt company name) Sales Accounts Receivable JAN 10,000 10,000 JAN 100 MAR Allowance for Uncollectible Bad Debt Expense JAN 500 500 JAN MAR 100

Direct Write Off Method Bad Debt Expense xxx Accts Recbl (Specific Name of Customer) Allowance Method 500 Bad Debt Expense Allowance for Doubtful Accts

Estimating the Allowance

Percentage-of-Sales Management estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy.

Percentage-of-Sales Bad debts expense 8,000 Ex: GeeCo uses the percentage-of-sales method. Analysis shows that 1% of net credit sales will become uncollectible. If net credit sales for 2015 are $800,000, the adjusting entry is: * Dec. 31 Bad debts expense 8,000 Allowance for doubtful accts 8,000 * $800,000 x 1%

Percentage-of-Sales Emphasizes matching of expenses with revenues. Adjusting entry to record bad debts disregards the existing balance in Allowance for Doubtful Accounts.

Aging Accounts Receivable Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts.

Aging Accounts Receivable Customer A/R balances classified by “how long” unpaid.

Aging Accounts Receivable Ex: Unadjusted trial balance shows Allowance for Doubtful Accounts with a credit balance of $528. Prepare adjusting entry if $2,228 is the estimate from the aging (prior slide). INCLUDE the existing $528 in your calculation. $2,228 (needed based on the aging) – $528 (existing balance) = $1,700 the adj amount Dec. 31 Bad debts expense 1,700 Allowance doubtful accts 1,700 Illustration 8-9 Bad debts accounts after posting

Factoring Selling off (disposing of) Accounts Receivable Companies sell receivables for two major reasons. Receivables may be the only reasonable source of cash. Billing and collection are often time-consuming and costly.

Factoring Factor Finance company or bank. Buys receivables from businesses and then collects the payments directly from the customers. Typically charges a commission to the company that is selling the receivables. Fee ranges from 1-3% of the receivables purchased.

Factoring Cash 588,000 Service charge expense 12,000 Ex: Henry’s Furniture factors (sells) $600,000 of receivables to Factors Inc. Factors Inc. charges 2% of the receivables sold. The journal entry to record the sale by Henry’s Furniture is: Cash 588,000 Service charge expense 12,000 Accounts receivable 600,000 ($600,000 x 2% = $12,000)

Credit Card Sales Cash 970 Service charge expense 30 Ex: Joe buys a $1,000 TV from BestBuy, using a Visa Card. Visa charges a 3% fee. The entry for BestBuy is: Cash 970 Service charge expense 30 Sales revenue 1,000

Notes Receivable Companies may grant credit in exchange for a “note”. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used when individuals and companies lend or borrow money, when amount of transaction and credit period exceed normal limits, or in settlement of accounts receivable.

Notes Receivable To the Payee (who accepted the note), it is a note receivable. To the Maker (guy who owes), it is a note payable.

Notes Receivable Determining the Maturity Date Computing Interest Note expressed in terms of Months Days Computing Interest

Notes Receivable Computing Interest When counting days, omit the date the note is issued, but include the due date. Illustration 8-15

Notes Receivable Recognizing Notes Receivable Notes receivable 10,000 Ex: CustomerCorp wrote a $10,000, 5 month, 9% promissory note dated June 1, in payment of a debt he owes your company. . Prepare entry you would make to accept the note. JUNE 1 Notes receivable 10,000 Accounts receivable 10,000

Notes Receivable Accrual of Interest Receivable Ex: June 31 … Accrue the interest on the 5-month, 10,000 note at 9% which you accepted from CustomerCorp on June 1. Interest receivable 180 JUNE 30 Interest revenue 180 ($10,000 x 9% = 900 per year / 12 = $ 180) Annual Interest Amount Interest $ for one month

Notes Receivable Disposing of Notes Receivable Notes may be held to their maturity date when maker pays (honors) the note. Maker may default (dishonors) and payee must make an adjustment to the account. Holder speeds up conversion to cash by selling the note receivable.

Notes Receivable JUNE 1 Notes receivable 10,000 Accounts receivable 10,000 Honor of Notes Receivable (you collect the note you are owed) Cash 10,375 NOV 1 Notes receivable 10,000 Interest revenue 375 ($10,000 x 9% x 5/12 = $ 375) Portion of a year (5 of 12 months)

Notes Receivable Dishonor of Notes Receivable (the guy does not pay) JUNE 1 Notes receivable 10,000 Accounts receivable 10,000 Dishonor of Notes Receivable (the guy does not pay) Account Receivable 10,375 NOV 1 Notes receivable 10,000 Interest revenue 375