FOR ACCOUNTING RECEIVABLES
Chapter 9
ACCOUNTS RECEIVABLE
Amounts due from customers
for credit sales.
Credit sales require:
Maintaining a separate
account receivable for each
customer.
Accounting for bad debts that
result from credit sales.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide2
SALES ON CREDIT
Accounts Receivable Ledger
RDA Electronics
Date
PR Debit Credit
Jun 30
1,000
Jul 1
720
Balance
1,000
280
CompStore
Date
PR Debit Credit
Jun 30
2,000
Jul 1
950
Balance
2,000
2,950
Schedule of
Accounts Receivable
RDA Electronics
$ 280
CompStore
2,950
Total
$ 3,230
General Ledger
Date
Jul 1
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Accounts Receivable
PR Debit Credit Balance
3,230
3,230
Slide3
VALUING ACCOUNTS
RECEIVABLE
Some customers may not pay
their account. Uncollectible
amounts are referred to as bad
debts. There are two methods of
accounting for bad debts:
accounting
Direct Write-Off Method
Allowance Method
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide4
DIRECT WRITE-OFF METHOD
On January 23rd, TechCom determined that it
can not collect $520 owed by its customer, J.
Kent.
Jan 23
Bad Debts Expense
Accounts Receivable - J. Kent
DR
520
CR
520
To write-off uncollectible account
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide5
RECOVERING A BAD DEBT
Although
uncommon, sometimes an
account written off is later collected.
How
should we prepare the journal entries?
On March 11th, J. Kent was able to make full payment
to TechCom for the amount previously written-off.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide6
DIRECT WRITE-OFF METHOD
Mar 11
Accounts Receivable - J. Kent
Bad Debts Expense
DR
520
CR
520
To reinstate account previously written-off
Mar 11
Cash
520
Accounts Receivable - J. Kent
520
To record payment on account
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide7
DIRECT WRITE-OFF METHOD
What accounting principle would be violated with
the direct write-off method?
How can the matching principle be complied with
under the circumstances?
The Allowance Method uses estimation of
uncollectible A/R to reflect Bad Debts Expense in
the proper period and is required under GAAP
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide8
MATCHING VS. MATERIALITY
Matching requires
expenses to be
reported in the same
accounting period as
the sales they help
produce.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Materiality states
that an amount can
be ignored if its
effect on the
financial statements
is unimportant to
users business
decisions.
Slide9
ALLOWANCE METHOD
At the end of each period, record an
At the end of each period, record an
estimate off the uncollectible
estimate o the uncollectible
accounts.
accounts.
Selling expense
Selling expense
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Contra-asset account
Contra-asset account
Slide10
BALANCE SHEET
PRESENTATION
At the end of its first year of operations, TechCom estimates
that $1,500 of its accounts receivable would be
uncollectible. The total accounts receivable balance at
December 31, 2009, is $20,000, and the company had total
credit sales of $300,000 during the year.
TechCom
Partial Balance Sheet
December 31, 2009
Cash
Accounts receivable
Less: Allowance for doubtful accounts
$
20,000
1,500
$
18,500
The net realizable value is the amount of accounts receivable that the
business expects to collect.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide11
ESTIMATING BAD DEBTS
EXPENSE
Two Methods
Two Methods
1. .
1
2. .
2
Percent of Sales Method
Percent of Sales Method
Accounts Receivable Methods
Accounts Receivable Methods
q
q
q
q
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Percent of Receivable Method
Percent of Receivable Method
Aging of Receivable Method
Aging of Receivable Method
Slide12
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide13
PERCENT OF SALES METHOD
Bad debts expense is computed as follows:
Musicland has credit sales of $400,000 in 2009. It is
estimated that 0.6% of credit sales will eventually
prove uncollectible.
Lets look at recording Bad Debts Expense for 2009.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide14
PERCENT OF SALES METHOD
Musiclands accountant
computes estimated
Bad Debts Expense of
$2,400.
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
DR
2,400
CR
2,400
To record estimated bad debts
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide15
PERCENT OF RECEIVABLES
METHOD
Compute
the estimate of the Allowance
for Doubtful Accounts.
Bad
Debts Expense is computed as:
Expected ending balance of allowance for doubtful accounts
- Balance of allowance for doubtful accounts prior to adjustment
= Current Bad Debts Expense
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide16
PERCENT OF ACCOUNTS
RECEIVABLE
Musicland has $50,000 in
Musicland has $50,000 in
accounts receivable and a $200
accounts receivable and a $200
credit balance in Allowance for
credit balance in Allowance for
Doubtful Accounts on December
Doubtful Accounts on December
31, 2009. Past experience
31, 2009. Past experience
suggests that 5% of receivables
suggests that 5% of receivables
are uncollectible.
are uncollectible.
Lets record Musiclands Bad
Lets record Musiclands Bad
Debts Expense for 2009.
Debts Expense for 2009.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide17
PERCENT OF ACCOUNTS
RECEIVABLE
Desired balance in Allowance for
Doubtful Accounts.
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
DR
2,300
CR
2,300
To record estimated bad debts
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide18
AGING OF ACCOUNTS
RECEIVABLE
Musicland
Schedule of Accounts Receivable by Age
December 31, 2009
Accounts
Receivable
Percent
Days Past Due
Balance
Uncollectible
Not Yet Due
1 - 30 Days Past Due
31 - 60 Days Past Due
61 - 90 Days Past Due
Over 90 Days Past Due
$
$
McGraw-Hill/Irwin
McGraw-Hill/Irwin
37,000
6,500
3,700
1,900
900
50,000
Estimated
Uncollectible
Amount
2% $
5%
10%
25%
40%
$
740
325
370
475
360
2,270
Slide19
AGING OF ACCOUNTS
RECEIVABLE
Musicland has an unadjusted
Musicland has an unadjusted
credit balance the in allowance
credit balance in the allowance
account is $200.
account is $200.
We estimated the proper
We estimated the proper
balance to be $2,270.
balance to be $2,270.
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
DR
2,070
CR
2,070
To record estimated bad debts
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide20
CREDIT CARD SALES
Advantages of allowing customers to use
credit cards:
Customers
Customers
credit is
credit is
evaluated by
evaluated by
tthe credit
he credit
card issuer.
card issuer.
Sales increase by
Sales increase by
providing purchase
providing purchase
options to the
options to the
customer.
customer.
The risks of extending
The risks of extending
credit are transferred to
credit are transferred to
tthe credit card issuer.
he credit card issuer.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Cash collections
Cash collections
are quicker.
are quicker.
Slide21
CREDIT CARD SALES
With bank credit cards, the seller
deposits the credit card sales receipt
in the bank just like it deposits a
customers check.
The bank increases the balance in the
companys checking account.
The company usually pays a fee of 1%
to 5% for the service.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide22
CREDIT CARD SALES
On July 15th, TechCom has $100 of credit card
sales with a 4% fee, and its $96 cash is received
immediately on deposit.
Jul 15
Cash
Credit Card Expense
Sales
DR
96
4
CR
100
To record credit card sales and fees
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide23
CREDIT CARD SALES
If instead TechCom must remit electronically the credit
card sales receipts to the credit card company and wait
for the $96 cash payment, we will make the first entry on
July 15th, and the second entry on July 28th, when the
cash is received.
Jul. 15
Accounts Receivable - Credit Card Co.
Credit Card Expense
Sales
DR
96
4
CR
100
To record credit card sales and fees.
Jul. 28
Cash
96
Accounts Receivable - Credit Card Co.
96
To record receipt from credit card company
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide24
NOTES RECEIVABLE
$1,000.00
Term
Ninety days
Payee
July 10, 2009
afterdateIpromisetopayto
Principal
theorderof TechCom, Los Angeles, CA
One thousand and no/100 ---------------------------------
Dollars
Payableat
First National Bank of Los Angeles, CA
Interest Rate
Maker
12%
Valuereceivedwithinterestatperannum
42
No.Due Oct. 8, 2009
Julia Browne
Due Date
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide25
INTEREST COMPUTATION
Even for
Even for
maturities less
maturities less
tthan one year,
han one year,
tthe rate is
he rate is
annualized.
annualized.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
If the note is
If the note is
expressed in
expressed in
days, base a
days, base a
year on 360
year on 360
days.
days.
Slide26
COMPUTING MATURITY AND
INTEREST
On July 10, 2009, TechCom received a $1,000, 90-day, 12%
promissory note as a result of a sale to Julia Browne.
What is the maturity date of the note?
Days in July
Minus the date of the note
Days remaining in July
Days in August
Days in September
Days in October to maturity
Period of the note in days
31
10
21
31
30
8
90
The note is due and payable on October 8, 2009.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide27
RECOGNIZING NOTES
RECEIVABLE
Jul 10
Notes Receivable
S ales
DR
1,000
CR
1,000
Sold goods in exchange for note
Oct 8
DR
1,030
Cash
Interest Revenue
Notes Receivable
CR
30
1,000
Collected note and interest due
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide28
RECORDING A DISHONORED
NOTE
TechCom holds an $800, 12%, 60-day note of Greg Hart.
TechCom holds an $800, 12%, 60-day note of Greg Hart.
At maturity, October 14th,, Hart dishonors the note.
At maturity, October 14th Hart dishonors the note.
$800 12% 60/360 = $16 interest
Accounts Receivable -Greg Hart
Interest revenue
Notes Receivable
DR
816
CR
16
800
To principal and interest on dishonored note
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide29
RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
On December 16th, TechCom accepts a $3,000, 60day, 12% note from a customer in granting an
extension on a past-due account. When TechComs
accounting period ends on December 31, $15 of
interest has accrued on the note.
$3,000 12% 15/360 = $15 accrued interest
Dec. 31 Interest Receivable
Interest Revenue
DR
15
CR
15
To accrue interest on note
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide30
COLLECTION ON NOTE AT
MATURITY
Recording collection on note at maturity.
Days in December
Minus the date of the note
Day remaining in December
Days in January
Days in February
Period of the note in days
Feb 14
31
16
15
31
14
60
DR
3,060
Cash
Interest Receivable
Interest Revenue
Notes Receivable
CR
15
45
3,000
To record full payment of note
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide31
DISPOSING OF RECEIVABLES
Companies
sometimes want to
convert receivables to cash before
they are due.
They can sell or factor receivables.
They may pledge receivables as
security for a loan.
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide32
ACCOUNTS RECEIVABLE
TURNOVER
This ratio provides useful information for evaluating how
efficient management has been in granting credit to
produce revenue.
Net sales
Average accounts receivable
$ in millions
Dell
Net sales
Average accounts receivable
Accounts receivable turnover
Apple
Net sales
Average accounts receivable
Accounts receivable turnover
McGraw-Hill/Irwin
McGraw-Hill/Irwin
2006
2005
2004
2003
$
57,420 $ 55,788
4,352
3,826
13.2
14.6
$
49,121
4,025
12.2
$
41,327
3,111
13.3
$
19,315 $ 13,931
1,074
835
18.0
16.7
$
8,279
770
10.8
$
6,207
666
9.3
Slide33
DAYS SALES UNCOLLECTED
How much time is likely to pass before
How much time is likely to pass before
we receive cash receipts from credit sales.
we receive cash receipts from credit sales.
Days
Sales
Uncollected
McGraw-Hill/Irwin
McGraw-Hill/Irwin
=
Accounts Receivable
Net Sales
365
Slide34
END OF CHAPTER 9
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Slide35