1. ACCOUNTING FOR RECEIVABLES Unit 8

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 13.50 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 31Accounts Receivable - Adorable Interest Revenue 13.50 To record interest on amount due. When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.

8. 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

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

10. 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

11. 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. 200 200

12. 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

13. 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. This journal entry is considered an adjusting entry THE ALLOWANCE METHOD

14. ADORABLE JUNIOR GARMET Balance Sheet (partial) Current assets Cash $ 14,800 Accounts receivable$200,000 Less: Allowance for doubtful accounts 24,000 188,000 Net Realizable Value

15. 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 500 500

16. 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. 500 500

17. THE ALLOWANCE METHOD GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit July 1Cash Accounts Receivable —Nadeau To record collection from Nadeau. 500 500 2. Record the collection in the usual manner.

18. SUMMARY OF TYPICAL JOURNAL ENTRIES RELATED TO RECEIVABLES – ALLOWANCE METHOD Record credit sale of merchandise (assume perpetual system) [date of sale]. (1) Accounts Receivable Sales (2) Cost of Goods Sold Merchandise Inventory Estimate and record uncollectible accounts as doubtful [end of period]. Bad Debts Expense Allowance for Doubtful Accounts Write off accounts receivable (no longer doubtful) [date of occurrence]. Allowance for Doubtful Accounts Accounts Receivable Record subsequent recovery of written off account [date of occurrence]. (1) Accounts Receivable Allowance for Doubtful Accounts (2) Cash Accounts Receivable