1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just...
-
Upload
arabella-boyd -
Category
Documents
-
view
217 -
download
0
Transcript of 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just...
![Page 1: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/1.jpg)
1
Chapter 8
![Page 2: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/2.jpg)
2
• Receivables - amounts owed to company by others.
• Accounts Receivable– Company just bills its customers/clients– Result from rendering services or selling
products to the public.
![Page 3: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/3.jpg)
3• Notes Receivable
– Evidenced with promissory notes• Formal written debt instruments• Usually bear interest• Usually has fixed maturity date
– Doesn’t have to – Demand Note
• When customers pay A/R slowly– Make customers sign promissory note & pay interest
![Page 4: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/4.jpg)
4• Company should write off A/R where no
hope of collecting the A/R– Conservatism – Don't show worthless A/R as
an asset • This is misleading
![Page 5: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/5.jpg)
5
• Two methods to write off bad A/R – Direct method
• Not GAAP
– Allowance method• GAAP
![Page 6: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/6.jpg)
6
• Another GAAP principle is materiality– If amount is not material, you don’t need to
follow GAAP.– Something is material if person's actions
would be different if he or she knew the item in question.
– If bad A/R not a material amount• You can use direct method
– Otherwise must use allowance method.
![Page 7: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/7.jpg)
7
D. Uncollectible Accounts Expense $100
Cr. Accounts Receivable $100
• Direct method– Charge uncollectible accounts to an expense
in the period of default• A selling expense• May not coincide with the period of the related sale
– Violates Matching Principle
![Page 8: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/8.jpg)
8
D. Accounts Receivable $100
Cr. Uncollectible Accounts Expense $100
• If you write off A/R & customer eventually pays– First, reinstate A/R.
• Reverse the prior journal entry.
![Page 9: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/9.jpg)
9
D. Cash $100
Cr. Accounts Receivable $100
• Second, you record that the A/R has been paid:
![Page 10: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/10.jpg)
10
D. Uncollectible Accounts Expense $12,000
Cr. Allowance for Uncollectible Accounts
$12,000
• Allowance Method – Matching Principle
• Expense should be recorded in the same period as the related sale
• Need to estimate bad debts each year• Company does not know which customer won’t
pay.– So, you don’t write off any particular A/R– Instead you reduce A/R with a contra account
» Allowance For Bad Debts
![Page 11: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/11.jpg)
11
Accounts Receivable $200,000
Less: Allowance for Uncollectible Accounts 12,000
-------------
$188,000
• Allowance for Uncollectible Accounts is contra account to A/R– Reduces A/R to amount estimated to be
collectible.– Net number is the net realizable value of the
A/R.
![Page 12: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/12.jpg)
12
D. Allowance for Uncollectible Accounts $100
Cr. Accounts Receivable $100
• Write off A/R when clear that it won’t be paid: – Note that there is no expense involved in the
entry. • No Bad Debt Expense• Expense happened in year of sale
![Page 13: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/13.jpg)
13
• After write-off– A/R net value does not change
• Specific A/R was written off• Allowance for Uncollectible Accounts decrease by
the same amount
![Page 14: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/14.jpg)
14
D. Accounts Receivable $100
Cr. Allowance for Uncollectible Accounts
$100
• When customer pays after A/R written off– First, reinstate customer's A/R
![Page 15: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/15.jpg)
15
D. Cash $100
Cr. Accounts Receivable $100
Second, record collection
![Page 16: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/16.jpg)
16
• Most common methods for estimating uncollectible A/R– Percentage of net sales method and– Accounts receivable aging method.
![Page 17: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/17.jpg)
17
• Percentage of sales method– Estimated percentage for uncollectible
accounts is multiplied by net sales (or net credit sales) for the period.
– The resulting figure is then used in adjusting entry.
![Page 18: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/18.jpg)
18
• Previous balance in Allowance for Uncollectible Accounts– amounts from previous years - not yet been written off– irrelevant in making adjusting entry.
• If:– You have net sales of $300,000– You believe that 1% of your sales will not be collected– Place $3,000 into the allowance.
![Page 19: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/19.jpg)
19
• Aging of accounts receivable method (Percentage of receivables basis)– Separate A/R by age categories– The total amounts in each category are
multiplied by a different percentage (a different probability of default for each age category)
– Add up products for estimate of total bad debts.
![Page 20: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/20.jpg)
20
• Adjusting entry is for amount that brings Allowance for Uncollectible Accounts to the computed figure. – If you estimate a total of $3,000 of you’re A/R
will not be paid, and – Your allowance has a credit balance of
$1,000, – Credit the allowance (and debit bad debt
expense) for $2,000.
![Page 21: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/21.jpg)
21
• A promissory note has two parties– Maker (debtor) and – Payee (lender)
![Page 22: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/22.jpg)
22
• Promissory note– Formal debt instrument– Usually bears interest
• Interest on notes with terms of a year or less– Interest usually paid at maturity.
– Usually has maturity date• Can be demand note.• Maturity value is the amount owed by maker at
maturity.
![Page 23: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/23.jpg)
23
• Promissory notes:– Loan to someone– Received in the sale of expensive
merchandise or other assets• Extended payments• E.g., sales of automobiles
– In exchange for delinquent A/R
![Page 24: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/24.jpg)
24
• When promissory note replaces A/R– Maker is customer who can’t pay A/R on time.– Company gives more time, but wants interest.– Company converts A/R into interest bearing
promissory note.
![Page 25: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/25.jpg)
25
D. Notes Receivable $6,000
Cr. Accounts Receivable $6,000
• Assume a $6,000, 10%, six-month promissory note is issued in place of A/R:
![Page 26: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/26.jpg)
26
D. Cash $6,300
Cr. Notes Receivable $6,000
Interest Revenue 300
• When the note matures, the maker pays the principle and the accrued interest:
![Page 27: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/27.jpg)
27
D. Account Receivable $6,300
Cr. Notes Receivable $6,000
Interest Revenue 300
• If the note is dishonored:– Company just has A/R again. – No more interest will accrue thereafter
![Page 28: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/28.jpg)
28
Dec. 1
D. Notes Receivable $6,000
Cr. Accounts Receivable
$6,000
• Supposed to accrue interest revenue in the period earned even though not yet paid (Adjusting Entry).
• Assume 3-month promissory note is issued in December:
![Page 29: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/29.jpg)
29
Dec.31 D. Interest Receivable $50
Cr. Interest Revenue $50
![Page 30: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/30.jpg)
30
March 1 D. Cash $6,150
Cr. Notes Receivable $6,000
Interest Receivable 50
Interest Revenue 100
• A promissory note is honored when it is paid in full at its maturity date.
![Page 31: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/31.jpg)
31
• Managing Accounts Receivable– Company with A/R needs to watch the
following steps carefully:
![Page 32: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/32.jpg)
32
• Extending Credit– Who should get credit?
• E.g., look at credit reports, ask for guarantees or letters of credit
– Your credit policies have to be competitive• But, you still want to make sure you will get paid.
![Page 33: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/33.jpg)
33
• Establishing a Payment Period– You have to be competitive.– Consider offering incentives for customers to
pay early (e.g., sales discounts).
![Page 34: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/34.jpg)
34• Monitoring Collections
– Make sure customers are paying you.– Look at Credit Risk Ratio:
Allowance for Doubtful Accounts
---------------------------------------------
Accounts Receivable
– A disproportionate increase in this ratio• Warning more customers are not paying A/R
![Page 35: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/35.jpg)
35
• Accelerating Cash Receipts– Company needs cash faster than customers
are paying A/R – A company can sell it’s A/R to a factor. – Factor charges a fee to purchase the A/R.
• Treated as an expense– operating expense or – other expense
![Page 36: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/36.jpg)
36
D. Cash $588,000
Service Charge Expense 12,000
Cr. Accounts Receivable $600,000
![Page 37: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/37.jpg)
37
• Similar to treatment of VISA or MasterCard credit card sale
• Credit card company is agreeing to issue credit to your customers– so that you don’t have to
![Page 38: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/38.jpg)
38
D. Cash $970
Service Charge Expense 30
Cr. Sales $1,000
![Page 39: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/39.jpg)
39
• Evaluating the Receivable Balance– When evaluating company’s credit policies
management looks at two measures: – (i) Receivables Turnover Ratio, and – (ii) Average Collection Period.
![Page 40: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/40.jpg)
40
• Receivables Turnover Ratio– tells you how many times you give and collect
credit (A/R) during the year, on average:
Net Credit Sales
-----------------------------------------------------
Average Net Accounts Receivable
![Page 41: 1 Chapter 8. 2 Receivables - amounts owed to company by others. Accounts Receivable –Company just bills its customers/clients –Result from rendering services.](https://reader030.fdocuments.us/reader030/viewer/2022032606/56649eb75503460f94bc18ce/html5/thumbnails/41.jpg)
41
• Average Collection Period
• Reflects the number of days it takes to collect a firm’s A/R:
365
---------------------------------------------
Receivables Turnover Ratio