1. 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

2. 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.

3. 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/ Your journal entry is:
Jul. 1
Accounts Receivable 1,000
Sales Revenue 1,000

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

5. 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.

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

8. 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.

9. 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, JAN
JAN 2,000
1, FEB
MAY
Bad Debt Expense
MAY 100

10. 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.

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

12. 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.

13. Accounts Receivable
JAN … You sell $100 to 100 customers on credit = $10,000.
Based on your company’s credit & collection experience, % 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)

14. 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, JAN
Allowance for Uncollectible
Bad Debt Expense
JAN
JAN 500

15. 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, JAN
MAR
Allowance for Uncollectible
Bad Debt Expense
JAN 500
JAN
MAR 100

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

18. Estimating the Allowance

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

20. 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 ,000
* $800,000 x 1%

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

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

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

25. 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 Bad debts accounts after posting

27. 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.

28. 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.

29. 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 ,000
($600,000 x 2% = $12,000)

31. 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

33. 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.

34. 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.

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

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

37. 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

38. 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

39. 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.

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

41. 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 ,375
NOV 1
Notes receivable ,000
Interest revenue