Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.

Slides:



Advertisements
Similar presentations
Accounting Principles, 6e Weygandt, Kieso, & Kimmel
Advertisements

Accounting Principles
Accounting for Merchandising Operations
1 Financial Accounting: Tools for Business Decision Making, 4th Edition Kimmel, Weygandt, Kieso CHAPTER 8 Prepared by Ellen L. Sweatt Georgia Perimeter.
Financial Accounting, Fifth Edition
Prepared by: Carole Bowman, Sheridan College
ACCOUNTING FOR RECEIVABLES
Chapter 9-1. Chapter 9-2 Chapter 9 Accounting for Receivables Accounting Principles, Ninth Edition.
Financial Accounting, 4e Weygandt, Kieso, & Kimmel
CHAPTER 9 ACCOUNTING FOR RECEIVABLES. CHAPTER 9 ACCOUNTING FOR RECEIVABLES CHAPTER 9 ACCOUNTING FOR RECEIVABLES STUDY OBJECTIVES After studying this chapter,
Credit Cards and Notes Receivable Unit 8. Three parties are involved when credit cards are used in making retail sales: 1. the credit card issuer, 2.
Copyright © 2007 Prentice-Hall. All rights reserved 1 ReceivablesReceivables Chapter 9.
Chapter 9 Accounting for Receivables Adapted for Accounting 211 Professor John Ahmad.
1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso, Trenholm KIMMEL.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
PRINCIPLES OF FINANCIAL ACCOUNTING
8-1 REPORTING AND ANALYZING RECEIVABLES Financial Accounting, Sixth Edition 8.
John Wiley & Sons, Inc. © 2005 Chapter 9 Accounting for Receivables Prepared by Naomi Karolinski Monroe Community College and and Marianne Bradford Bryant.
8 ACCOUNTING FOR RECEIVABLES CHAPTER
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Edited by: Carolyn Doering, Huron Heights SS Weygandt · Kieso.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Chapter 8 Receivables.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
ACCOUNTING FOR RECEIVABLES Wed, Nov 26 will be Unit 3 Test (covering chapter 7 and 8) CHAPTER 8.
ACCOUNTING FOR RECEIVABLES Monday, Dec 1 will be Unit 3 Test (covering chapter 7 and 8) CHAPTER 8.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
1. 2 Chapter 6: The Current Asset Classification, Cash and Accounts Receivable.
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 5 Accounting for Merchandising Operations.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Unit 8 Estimating Bad Debts.
John Wiley & Sons, Inc. © 2005 Chapter 9 Accounting for Notes Receivable Prepared by Naomi Karolinski Monroe Community College and and Marianne Bradford.
1. 2 Chapter 8 REPORTING AND ANALYZING RECEIVABLES.
ACCOUNTING FOR RECEIVABLES STUDY OBJECTIVES After studying this material, you should understand: Types of receivables F/S Presentation & Analysis Recognition.
Chapter 9 Accounting for Receivables - Part 1. The term receivables refers to amounts due from individuals and other companies; they are claims expected.
Tools for Business Decision-Making Fourth Canadian Edition Financial Accounting: Prepared by: Peggy Coady Memorial University of Newfoundland & Catherine.
ACCOUNTING PRINCIPLES SIXTH CANADIAN EDITION Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 8 Accounting for Receivables.
Accounting Principles, Ninth Edition
ACCOUNTING FOR RECEIVABLES Unit 8. The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Revised by: Carolyn Doering, Huron Heights SS Weygandt · Kieso.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
Chapter 8-1. Chapter 8-2 Reporting and Analyzing Receivables Financial Accounting, Fifth Edition.
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 4 Completion of the Accounting Cycle.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Edited by: Carolyn Doering, HHSS Weygandt · Kieso · Kimmel.
DISPOSING OF ACCOUNTS RECEIVABLE
WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 10 Current Liabilities Prepared.
Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm.
Recognizing Notes Receivable Definition - A written promise to pay a specified amount of money on demand or at a definite time If note is received to settle.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil.
Chapter 9-1 ACCOUNTING FOR RECEIVABLES Accounting Principles, Eighth Edition CHAPTER 9.
Current ASSETS: Note and Account Receivable Chapter 7.
8-1 REPORTING AND ANALYZING RECEIVABLES Accounting, Fifth Edition 8.
1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso, Trenholm KIMMEL.
Chapter 12 Accounting for Receivables. 2 Receivables... Amounts due from individuals and companies - expected to be collected in cash. Frequently classified.
ACCOUNTING FOR RECEIVABLES CHAPTER 8 Agenda Learning goals Vocabulary Types of accounts receivable Accounts receivable Valuing accounts receivable Recognize.
ACCT 201 FINANCIAL REPORTING Chapter 9
Accounting for Receivables
ตั๋วเงินรับและลูกหนี้
Prepared by: Keri Norrie, Camosun College
Prepared by: Carole Bowman, Sheridan College
Chapter 6: Cash and Accounts Receivable
Prepared by: Carole Bowman, Sheridan College
ACCOUNTING FOR RECEIVABLES
Financial Accounting: Tools for Business Decision Making, 3rd Ed.
Prepared by: Keri Norrie, Camosun College
Accounting, Fifth Edition
Notes Receivable Chapter 9 – Part 3.
Presentation transcript:

Accounting Principles Second Canadian Edition Prepared by: Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel · Trenholm

ACCOUNTING FOR RECEIVABLES CHAPTER 9

The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash. Three major classes of receivables are: 1. Accounts Receivable 2. Notes Receivable 3. Other Receivables RECEIVABLESRECEIVABLES

The three primary accounting problems associated with accounts receivable are: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. ACCOUNTS RECEIVABLE

July 1 1,000 To record sales on account. 1,000 GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Accounts Receivable - Adorable Junior Sales RECOGNIZING ACCOUNTS RECEIVABLE When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.

100 RECOGNIZING ACCOUNTS RECEIVABLE When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 5Sales Returns and Allowances Accounts Receivable - Adorable 100 To record merchandise returned.

900 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Cash ($1,000 - $100) Accounts Receivable - Adorable 900 To record collection of account. When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited.

13.50 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Accounts Receivable - Adorable Interest Revenue To record interest on amount due. When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.

To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value. Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect. VALUING ACCOUNTS RECEIVABLE

Two methods of accounting for uncollectible accounts are: 1. Allowance method 2. Direct write-off method VALUING ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLEVALUING

Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense. No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet. DIRECT WRITE-OFF METHOD

GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Jan. 12Bad Debts Expense Accounts Receivable — E. Schaefer For write-off of E. Schaefer account. DIRECT WRITE-OFF METHOD Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles

The allowance method is required when bad debts are deemed to be material in amount. Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred. THE ALLOWANCE METHOD

Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period. THE ALLOWANCE METHOD

ADORABLE JUNIOR GARMET Balance Sheet (partial) Current assets Cash $ 14,800 Accounts receivable$200,000 Less: Allowance for doubtful accounts 24, ,000 Net Realizable Value

GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 1Allowance for Doubtful Accounts Accounts Receivable — Nadeau Write-off of Nadeau account. Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. THE ALLOWANCE METHOD

When there is recovery of an account that has been written off: 1. reverse the entry made to write off the account and... THE ALLOWANCE METHOD GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 1Accounts Receivable — Nadeau Allowance for Doubtful Accounts To reverse write-off of Nadeau account

THE ALLOWANCE METHOD GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 1Cash Accounts Receivable —Nadeau To record collection from Nadeau Record the collection in the usual manner.

Companies use either of two methods in the estimation of uncollectible accounts: 1. Percentage of sales 2. Percentage of receivables Both bases are GAAP; the choice is a management decision. BASES USED FOR THE ALLOWANCE METHOD

ILLUSTRATION 9-4 COMPARISON OF BASES OF ESTIMATING UNCOLLECTIBLES Percentage of Sales Percentage of Receivables Net Realizable Value Allowance Accountsfor ReceivableDoubtful Accounts Emphasis on Income Statement Relationships Emphasis on Balance Sheet Relationships

In the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. Expected bad debt losses are determined by applying the percentage to the sales base of the current period. This basis better matches expenses with revenues. PERCENTAGE OF SALES BASIS

Under the percentage of receivables basis, management establishes a percentage relationship between the amount of accounts receivable and the required balance in the allowance account. This percentage can be applied to the total accounts receivable balance, or to individual accounts receivable balances stratified by age. PERCENTAGE OF RECEIVABLES BASIS

The required balance in the allowance account is determined by applying the percentage to the accounts receivable balance at the end of the current period. The amount of the adjusting entry to record expected bad debt losses for the current period is the difference between the required balance and the existing balance in the allowance account. This basis produces the better estimate of net realizable value of receivables. PERCENTAGE OF RECEIVABLES BASIS

To accelerate the receipt of cash from receivables, owners frequently: 1. sell to a factor, such as a finance company or a bank, and 2. make credit card sales. DISPOSING OF ACCOUNTS RECEIVABLE

A factor buys receivables from businesses for a fee and collects the payments directly from customers. Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit. Retailers can receive cash more quickly from the credit card issuer. DISPOSING OF ACCOUNTS RECEIVABLE

Three parties are involved when credit cards are used in making retail sales: 1. the credit card issuer, 2. the retailer, and 3. the customer. The retailer pays the credit card issuer a percentage fee of the invoice price for its services. From an accounting standpoint, sales from bank cards (e.g., Visa and MasterCard) are treated differently than sales from non-bank cars (e.g., American Express). CREDIT CARD SALES

BANK CARD SALES Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailer. These cards are issued by banks. Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.

GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Cash Credit Card Expense ($1,000 x 3.5%) Sales To record VISA credit card sales. BANK CARD SALES Anita Ferreri purchases a number of compact discs for her restaurant from Karen Kerr Music Co. for $1,000 using her Royal Bank VISA card. The service fee that the Royal charges is 3.5 percent ,000

NON-BANK CARD SALES Sales using American Express and other non-bank cards are reported as credit sales, not cash sales. Conversion into cash does not occur until American Express remits the net amount to the seller.

NON-BANK CARD SALES Kerr Music Co. accepts an AMERICAN EXPRESS card for a $500 sale. The service fee that AMERICAN EXPRESS charges is 5 percent. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Accounts Receivable Credit Card Expense ($500 x 5%) Sales To record American Express credit card sales

A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. The party making the promise is the maker. The party to whom payment is made is called the payee. NOTES RECEIVABLE

The basic formula for calculating interest on an interest-bearing note is: The interest rate specified on the note is an annual rate of interest. ILLUSTRATION 9-8 FORMULA FOR CALCULATING INTEREST Face Value of Note Annual Interest Rate Time in Terms of One Year Interest X X =

RECOGNIZING NOTES RECEIVABLE Wilma Company receives a $1,000, 6% promissory note, due in two months (July 31) from Brent Company to settle an open account. 1,000

Like accounts receivable, short-term notes receivable are reported at their net realizable value. The notes receivable allowance account is Allowance for Doubtful Notes. VALUING NOTES RECEIVABLE

HONOUR OF NOTES RECEIVABLE A note is honoured when it is paid in full at its maturity date. Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4.5% interest-bearing note, due in 4 months, on September 30. Wolder collects the maturity value of the note from Higley on September 30.

DISHONOUR OF NOTES RECEIVABLE A dishonoured note is a note that is not paid in full at maturity. A dishonoured note receivable is no longer negotiable. Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable.

BALANCE SHEET PRESENTATION OF RECEIVABLES Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements. In the balance sheet, short-term receivables are reported within the current assets section below cash and temporary investments. Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

USING THE INFORMATION IN THE FINANCIAL STATEMENTS Financial ratios are calculated to evaluate the short-term liquidity of a company. These ratios include the 1. current ratio, 2. acid test (quick) ratio, 3. receivables turnover ratio, and the 4. collection period ratio.

CURRENT RATIO CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability.

CASH + TEMPORARY INVESTMENTS + RECEIVABLES (NET) ACID TEST RATIO = ———————————————————————————— CURRENT LIABILITIES ACID TEST RATIO The acid test ratio (quick ratio) is a measure of a company’s short-term liquidity.

ACCOUNTS RECEIVABLE TURNOVER RATIO The ratio used to assess the liquidity of the receivables is the receivables turnover ratio. Net Credit Average Net Receivables Sales Receivables Turnover  =

COLLECTION PERIOD The collection period in days is a variant of the receivables turnover ratio and makes liquidity even more evident. The general rule is that the collection period should not exceed the credit term period. Days in Year Receivables Collection (365) Turnover Period in Days  =

COPYRIGHT Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.