1 LO5 Describe accounting for receivables and uncollectible amounts. LO6Explain how returns and discounts are accounted for. LO7Account for long-term receivables.

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Presentation transcript:

1 LO5 Describe accounting for receivables and uncollectible amounts. LO6Explain how returns and discounts are accounted for. LO7Account for long-term receivables including when there is no interest specified. LO8Understand how managers can use accounting estimates to create hidden reserves to manage earnings. LO9Use information about accounts receivable to analyze and interpret financial statements. Learning objectives Copyright © 2013 McGraw-Hill Ryerson Limited

2 Receivables Amounts owing to an entity Usually result from selling on credit ▫ Accounts receivable Current asset ▫ If due within one year Copyright © 2013 McGraw-Hill Ryerson Limited LO5

3 Other Receivables Due from shareholders Tax refunds Owing from investments ▫Dividends ▫Interest Proceeds due on sale of asset Copyright © 2013 McGraw-Hill Ryerson Limited LO5

4 Uncollectible Receivables Possible losses is a cost of credit sales Must record the expense of the uncollectible amount Must reduce the asset Copyright © 2013 McGraw-Hill Ryerson Limited LO5

5 Valuing Receivables Valued at net realizable value (NRV) Factors affecting value ▫Non payment of accounts (bad debts) ▫Refunds to dissatisfied customers ▫Early payment discount Must make accounting estimates Copyright © 2013 McGraw-Hill Ryerson Limited LO5

6 Uncollectible Receivables 1.Direct Write-off Method Dr. Bad Debt Expense/Cr. AR 2.Allowance Method Estimates must be made Percentage-of-receivables method Percentage-of-credit-sales method Copyright © 2013 McGraw-Hill Ryerson Limited LO5

7 Percentage-of-Receivables Estimate by reviewing balances Accounts receivable aging schedule Adjust allowance to match estimate Balance sheet approach Copyright © 2013 McGraw-Hill Ryerson Limited LO5

8 Percentage-of-Credit-Sales Based on estimate of annual credit sales Income statement approach Consistently high or low — adjust % Copyright © 2013 McGraw-Hill Ryerson Limited LO5

9 Writing off Receivables Specific account deemed uncollectible ▫Reduce accounts receivable (Cr) ▫Reduce allowance (Dr) ▫No effect on net receivables balance ▫No effect on income statement until adjusting entry is made Copyright © 2013 McGraw-Hill Ryerson Limited LO5