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Unformatted text preview: CHAPTER 8 Reporting and Analyzing Receivables CHAPTER OVERVIEW In this chapter you will learn how to recognize and value accounts receivable, including how to record both estimated and actual bad debts. You will learn about notes receivable, including how to determine the maturity date, how to compute interest, and how to write journal entries for both the honoring and dishonoring of notes. Finally, you will learn about the issues involved in managing receivables. REVIEW OF SPECIFIC STUDY OBJECTIVES SO1. Identify the different types of receivables. The term "receivables" refers to amounts due from individuals and companies : They are claims expected to be collected in cash . Receivables are often one of the largest assets for a company and are one of the most liquid assets. Accounts receivable are amounts owed by customers on account and result from the sale of goods and services. Notes receivable are claims for which formal instruments of credit are issued as evidence of the debt . Unlike accounts receivable, notes receivable involve receipt of interest from the debtor. Notes and accounts receivable resulting from sales transactions are called trade receivables . 8-2 Kimmel Accounting: Tools for Business Decision Making Other receivables include non-trade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable . They are classified separately from accounts and notes receivable on the balance sheet. SO2. Explain how accounts receivable are recognized in the accounts. For a service organization , accounts receivable are recorded when service is provided on account . For a merchandiser , accounts receivable are recorded at the point of sale of merchandise on account . Receivables are reduced as a result of sales discounts and sales returns . SO3. Describe the methods used to account for bad debts. Receivables are reported on the balance sheet as a current asset , but as will be discussed, the amount at which they are reported can be problematic. If a credit customer cannot pay his bill, then the credit loss is debited to Bad Debts Expense, an income statement account. There are two methods of accounting for uncollectible accounts : the direct write- off method and the allowance method . Under the direct write-off method , the following entry is written when a specific customer's account is uncollectible : Bad Debts Expense Accounts Receivable (To write off an uncollectible account) Bad debts expense will show only actual losses, and accounts receivable will be reported at its gross amount on the balance sheet . Because revenues might be recorded in one period while the expense might be recorded in the next period, the direct write-off method has the potential for violating the matching principle ....
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