1. Accounts Receivable (AR)
Nature of, discounts (gross, net), allowance (income statement, balance sheet approach) versus direct write-off approach concerning bad debts, financing through pledging, assigning or factoring AR, and AR turnover

2. Nature of Accounts Receivable
Trade obligations of customers for goods and services
Assume collection reasonably assured
Cash versus additional revenue (Cost versus benefit)
Net realizable value = AR – allowance for doubtful accounts (conservatism)
Quality of AR determined from collectability of AR within credit terms (AR turnover)
To improve cash flow, may offer a time discount, such as 1% if paid in 12 days, and must be paid by day /12, net 30

3. AR Time discounts – net and gross method
Adjusts for discount right away and shows the net amount
Displays “Discounts Lost” account if not taken (revenue)
Conservative amount for Sales revenue and AR
Adjusts for discount when customer pays in discount period
Displays “Sales Discounts” account for discounts actually taken (contra revenue)
If material should estimate future sales discounts to be taken and journalize as an adjusting entry

4. Aging of Accounts Receivable and Accounts Receivable turnover –how efficiently are we collecting on account?
What is probability of collecting on AR? Higher if done sooner, more current!
AR subsidiary checked for dates of customer purchases on account for aging
Group customers into categories – not past due, 1-30 days past due, etc.
Estimate bad debts for each category, still a guess though may be more accurate than a flat %!
AR turnover – net credit sales/average AR (X times or # of days)

5. Direct write-off method versus the allowance method – matching and materiality
Quicker and easier to use
No estimating
Expense actual bad debts when an account is deemed uncollectible
Violates matching
Ok to use if very few credit customers or not materially different than allowance approach
More complicated
Bad debts estimated and expensed in the same period as the sales revenue
Supports matching

6. Allowance Approach to Bad Debts- Match bad debt expense to sales revenue, requiring estimation of bad debts and the use of the “allowance for bad debts” (AFBD)
Income statement approach
Balance sheet approach
% of sales revenue for bad debt estimate (ex. .5% of $2 million net sales = $2000 with no adjustment for AFBD balance, becomes amount in journal entry)
Focus on “bad debt expense”
No beginning balance in bad debt expense
Easier of methods
The calculation becomes the amount used in the journal entry
AR and allowance could get out of sync requiring a one time correction
% of AR, such as an aging of AR with estimation %’s for bad debt(ex. 2% of $100,000 ending AR to equal net realizable value (NRV))
Focus on “net realizable value” of AR
Usually a beginning balance in the allowance for bad debts –overestimated last year, journalize less in bad debts this year
A more complicated method
Forces AR and allowance to be in sync

7. Financing Accounts receivable- secured borrowing
Assignment
Pledging
AR is collateral for loan
Assigned usually with recourse
Often customer pays assignor
“AR assigned” –separated from other assets, proceeds for payment of loan
“Assignment service charge expense” & “interest expense”
Assignor responsible for sales returns & allowances, bad debts
AR is collateral for loan
Footnote only –some AR collections may not be available to creditors
AR could be transferred to 3rd party
No special accounting for this – no additional journal entries

8. Financing with Accounts Receivable --factoring
Sale without recourse (WOR)
Sale with recourse (WR)
Transferor (seller) loses control of AR
Transferee (factor) has rights (sell, etc.)
Often customer pays transferee (factor)
Advance less than 100% to cover returns
“factoring expense” higher than WR
Transferor (seller) responsible for sales returns & allowances
Transferee (factor) responsible for bad debts
Transferor (seller) loses control of AR
Transferee (factor) has rights (sell, etc.)
Often customer pays transferee (factor)
Advance less than 100% to cover returns
“factoring expense” lower than WOR
Transferor (seller) responsible for sales returns & allowances
Transferor (seller) responsible for bad debts-seller guaranteeing factor will be paid
Financial components approach, ”recourse liability” shows estimated fair value on transferor’s (seller’s) books, estimated bad debts