1. Reporting and Analyzing Receivables
Chapter 8
Reporting and Analyzing Receivables

2. Accounting for Receivables
A receivable is a company’s claims for money, goods, or services.
An account receivable is classified as a current asset representing money due for services performed or merchandise sold on credit.
When an account becomes uncollectible, a bad debt expense is incurred.

3. Example: Accounts Receivable
Assume merchandise is sold on account for $1,000. The terms of the agreement were 2/10, n/30. The entries are as follows:

4. Example: Accounts Receivable
Assume merchandise is sold on account for $1,000. The terms of the agreement were 2/10, n/30. The entries are as follows:
Credit Sale:
Accounts Receivable ,000
Sales Revenue ,000

5. Example: Accounts Receivable
Assume merchandise is sold on account for $1,000. The terms of the agreement were 2/10, n/30. The entries are as follows:
Credit Sale:
Accounts Receivable ,000
Sales Revenue ,000
Collection--2/10,n/30:
Cash
Sales Discounts
Accounts Receivable ,000

6. Uncollectible Accounts
Some receivables will never be collected and must be written off as uncollectible.

7. Uncollectible Accounts
Occurs when customers do not pay for items or services purchased on credit.
Bad Debts are uncollectible accounts receivables.
The uncollectible expense is placed on the income statement as a selling expense.

8. Two Methods of Accounting for Uncollectible Accounts
Direct Method
Or:
Allowance Method

9. EXAMPLE: If We Have $100,000 in A/R
Invoice
ABC Inc $
They would be represented by a stack of invoices
Direct Method
Under the
All invoices are presumed to be good . . .
(Valued at $100,000)
until we discover someone can’t pay the amount owed.

10. Direct Method
Invoice
ABC Inc $
When an invoice is discovered to be uncollectible — it must be removed from A/R.
That is it must be expensed or written off.

11. Direct Method Journal Entry to record Bad Debt: Dr. Cr.
Invoice
ABC Inc $
Journal Entry to record Bad Debt:
Dr Cr.
Bad Debt Expense
Accounts Receivable

12. Direct Method Problem:
Invoice
ABC Inc $
Problem:
Accounts Receivable is reported at the full $100,000 until bad debts are specifically identified.
But, we know some customers in the stack will not pay.
So, what is the real value of A/R?

13. Direct Method
Invoice
ABC Inc $
Like all assets, the value of A/R is only what you expect to collect.
Accounts Receivable is overstated.
Bad debt expense is understated!
It is not recorded in the same period the sale was made.

14. The Matching Principle
Requires expenses be recorded in the same period the corresponding revenue is recognized.
Direct Method is in conflict with the Matching Principle
Not accepted under GAAP

15. Allowance Method If We Have $100,000 in A/R
Under the
Allowance Method
Invoice
ABC Inc $
If We Have $100,000 in A/R
We presume some invoices will not be good . . .
We just don’t know which ones.

16. Allowance Method
How do we write off an unknown amount of Accounts Receivable?
ESTIMATE the amount, but don’t remove any invoices from A/R

17. An estimate can be based on:
Allowance Method
An estimate can be based on:
Size of the receivables
Age of the receivables
Past loss experience
All of the above

18. An estimate can be based on:
Allowance Method
An estimate can be based on:
Size of the receivables
Age of the receivables
Past loss experience
All of the above

19. Allowance Method
Assume you made an estimate that $2000 will not be collectable. What journal entry would you make?
Dr Cr.
Hint: Accounts Receivable is NOT reduced because which invoices will become uncollectable is unknown!

20. Allowance Method Dr. Cr. Bad Debt Expense 2000
Allowance for Doubtful Accounts
To record estimated bad debts

21. Balance Sheet Presentation
Assets:
Cash 20,000
Accounts Receivable 100,000
Supplies 2,500
PP&E 3,000,000
Total Assets 3,120,500
The Allowance for Doubtful Accounts is a contra asset that follows A/R

22. Balance Sheet Presentation
Assets:
Cash ,000
Accounts Receivable ,000
Less Allowance for DA ,000
Net Accounts Receivable 98,000
Supplies 2,500
PP&E 3,000,000
Total Assets 3,120,500
Note: Accounts Receivable is NOT reduced but the net receivable is!

23. Allowance Method
Journal Entry needed when an account is identified as uncollectible:
Dr Cr.
Allowance for Doubtful Accounts 500
Accounts Receivable
To write off Smith Co. (in bankruptcy)

24. Direct vs. Allowance Methods
The difference is
TIMING
Direct Method
Dr Cr.
May 5
Bad Debt Expense
Accounts Receivable
Allowance Method
Dr Cr.
Dec 31
Bad Debt Expense
Allowance for DA
May 5
Allowance for DA
Accounts Receivable

25. Allowance Method
(1) The Allowance for Doubtful Accounts is a contra-asset account which is subtracted from accounts receivable on the balance sheet.
(2) The actual write-off entry does not reduce net receivables, as shown below:
Acct Receivable $100, Acct Receivable $99,500
Less Allowance for Less Allowance for
Doubtful Accounts , Doubtful Accounts ,500
Net Receivables $ 98, Net Receivables $98,000

26. Allowance Method
(1) The Allowance for Doubtful Accounts is a contra-asset account which is subtracted from accounts receivable on the balance sheet.
(2) The actual write-off entry does not reduce net receivables.
(3) The estimation error inherent in this approach is more acceptable than the violation of matching with the direct write-off method.

27. Reversing Written-Off Receivables
Reverse Write Off:
Accounts Receivable
Allowance for Doubtful Accounts
To reinstate a written-off receivable.

28. Reversing Written-Off Receivables
Reverse Write Off:
Accounts Receivable
Allowance for Doubtful Accounts
To reinstate a written-off receivable.
Eliminate Receivable:
Cash
Accounts Receivable
Payment for written-off receivable.

29. Estimating the Allowance for Uncollectible Accounts
Percentage of Total Receivables-- Determines the desired balance for Allowance for Doubtful Accounts. The difference between the actual and the desired balance is the expense entry.
Aging Method--The process of categorizing each account receivable by the number of days it has been outstanding.

30. Example: Bad Debt Expense
The ABC company had credit sales of $100,000. The current accounts receivable balance is $30,510. The allowance for doubtful accounts balance is $350. Historically, 10 percent of the accounts receivable ending balance is not collected.

31. Allowance for Doubtful Accounts
Example: Bad Debt Expense
The ABC company had credit sales of $100,000. The current accounts receivable balance is $30,510. The allowance for doubtful accounts balance is $350. Historically, 10 percent of the accounts receivable ending balance is not collected.
Bad Debt Expense
350 Balance
Expense , ,701 Expense
End. Balance 2, ,051 End. Bal.
Allowance for Doubtful Accounts

32. Allowance for Doubtful Accounts
Example: Bad Debt Expense
The ABC company had credit sales of $100,000. The current accounts receivable balance is $30,510. The allowance for doubtful accounts balance is $350. Historically, 10 percent of the accounts receivable ending balance is not collected.
Bad Debt Expense
350 Balance
Expense , ,701 Expense
End. Bal , ,051 End. Bal.
Allowance for Doubtful Accounts
Bad Debt Expense ,701
Allowance for Doubtful Accounts ,701
To adjust the Allowance account to desired balance.

33. Example 2: Bad Debt Expense
The XYZ Company had credit sales during the year of $200,000. Using the Aging Method, determine the journal entry needed. The beginning balance for the Allowance for Doubtful accounts is $150.
Percentage
Estimated to be
Age Balance Uncollectible Amount
Current $10, $ 150
1-30 days ,
31-90 days ,
Over 90 days ,
$17, $1,130

34. Uncollectible Account Allowance for Doubtful Accounts
Example 2: Bad Debt Expense
The XYZ Company had credit sales during the year of $200,000. Using the Aging Method, determine the journal entry needed. The beginning balance for the Allowance for Doubtful accounts is $150.
Uncollectible Account
Expense
Allowance for Doubtful Accounts
150 Balance
Expense Expense
End. Bal ,130 End. Bal.
980

35. Uncollectible Account Allowance for Doubtful Accounts
Example 2: Bad Debt Expense
The XYZ Company had credit sales during the year of $200,000. Using the Aging Method, determine the journal entry needed. The beginning balance for the Allowance for Doubtful accounts is $150.
Uncollectible Account
Expense
Allowance for Doubtful Accounts
150 Balance
Expense Expense
End. Bal ,130 End. Bal.
Uncollectible Account Expense
Allowance for Doubtful Accounts
To adjust the Allowance account to desired balance.

36. Accounting for Uncollectible Receivables (Percentage of Credit Sales)
The ABC company had credit sales during the year of $100,000. They estimate that 3% of all credit sales will be uncollectible. Assuming the allowance for doubtful accounts has a debit balance of $ 1,000 what entry is necessary?

37. Accounting for Uncollectible Receivables (Percentage of Credit Sales)
The ABC company had credit sales during the year of $100,000. They estimate that 3% of all credit sales will be uncollectible. Assuming the allowance for doubtful accounts has a debit balance of $ 1,000 what entry is necessary?
Uncollectible Accounts Expense ,000
Allowance for Uncollectible Accounts ,000
To record estimated uncollectible accounts for the year.

38. Assessing Management of Receivables
Accounts Receivable Turnover--A measure used to determine a company’s average collection period for receivables. Computed by dividing net sales (credit sales) by average accounts receivables.

39. Assessing Management of Receivables
Accounts Receivable Turnover
Number of Days in Receivables--A measure of the average number of days it takes to collect a credit sale. It is computed by dividing 365 days by the accounts receivable turnover.

40. Example
The Wheeler Company had Net Credit Sales of $150,000 during The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the Accounts Receivable Turnover and Number of Days in Receivables.

41. Example
The Wheeler Company had Net Credit Sales of $150,000 during The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the Accounts Receivable Turnover and Number of Days in Receivables.
Accounts Receivable Turnover:
Net Sales $150,000 = 4.0
Average Accounts Receivable $ 37,500

42. Example
The Wheeler Company had Net Credit Sales of $150,000 during The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the Accounts Receivable Turnover and Number of Days in Receivables.
Number of Days in Receivables:
Number of Days =
Accounts Receivable Turnover

43. Notes Receivable
A written promise that allows someone to pay a certain amount of money on or before a specific future date.
Notes are classified as current or long-term assets, depending on the due date.

44. Notes Receivable -- Components
Maker--The individual who signs the note and assumes responsibility.
Payee--The person to whom payment is made.
Principal--The face amount of the note.
Maturity Date--The date the note becomes due.
Interest Rate--Annualized percentage of the principal the maker is charged to borrow money.
Interest--The cost of borrowing money.

45. Computing Interest
Principal (amount)

46. Computing Interest
Principal (amount)
Interest Rate (%) X

47. X X Computing Interest Principal (amount) Interest Rate (%)
Time (years) X X

48. X X Equals Computing Interest Principal (amount) Interest Rate (%)
Time (years) X X
Equals
Interest Owed

49. Example: Interest
The Ohio Company signed a 90-day, $5,000 note payable to the Florida Company in settlement of existing accounts payable. The interest rate of the agreement is 14 percent. Calculate the interest cost.

50. Example: Interest $5,000 x 0.14 x 90/365 = $172.60
The Ohio Company signed a 90-day, $5,000 note payable to the Florida Company in settlement of existing accounts payable. The interest rate of the agreement is 14 percent. Calculate the interest cost.
Principal x Interest Rate x Time = Interest
$5,000 x x 90/365 = $172.60
What journal entries are required for the Ohio Company? For the Virginia Company?

51. Journalizing Notes Receivable
The Ohio Company--Maker
Accept Note:
Accounts Payable ,000.00
Note Payable ,000.00
Pay Note Plus Interest:
Note Payable ,000.00
Interest Expense
Cash ,172.60

52. Journalizing Notes Receivable
The Virginia Company--Payee
Accept Note:
Note Receivable ,000.00
Accounts Receivable ,000.00
Collect Note Plus Interest:
Cash ,172.60
Note Receivable ,000.00
Interest Revenue

53. Selling or Factoring Receivables
Receivables are sold to factoring companies for cash.
The factoring companies charge a percentage of the receivable as a service cost.
Factoring allows companies to receive cash now, instead of waiting to collect on the receivable.