Lecture Notes- Chapter 8

Lecture Notes- Chapter 8 - Chapter 8 Reporting and...

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Chapter 8 Reporting and Analyzing Receivables Chapter Outline Study Objective 1 - Identify the Different Types of Receivables h The term receivables refers to amounts due from individuals and companies. h Receivables are claims that are expected to be collected in cash. h Receivables represent one of a company’s most liquid assets. h Receivables are frequently classified as: h Accounts receivable: h Are amounts owed by customers on account. h Result from the sale of goods and services (often called trade receivables ). h Are expected to be collected within 30 to 60 days. h are usually the most significant type of claim held by a company. h Notes receivable: h Represent claims for which formal instruments of credit are issued as evidence of debt. h Are credit instruments that normally require payment of interest and extend for time periods of 60-90 days or longer. h May result from sale of goods and services (often called trade receivables ). h Other receivables: h Nontrade receivables including interest receivable, loans to company officers, advances to employees, and income taxes refundable. h Generally classified and reported as separate items in the balance sheet. Study Objective 2 - Explain how Accounts Receivable are Recognized in the Accounts Two accounting problems associated with accounts receivable are: 1. Recognizing accounts receivable 2. Valuing accounts receivable Recognizing accounts receivable h Service organizations -- A receivable is recorded when service is provided on account. 8-1
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Debit accounts receivable and credit service revenue h Merchandisers – A receivable is recorded at the point of sale of merchandise on account. h Debit accounts receivable and credit sales h Receivable may be reduced by sales discount and/or sales return Valuing accounts receivable h Some accounts receivable will become uncollectible. h This creates bad debt expense – a normal and necessary risk of doing business on credit. Study Objective 3 - Describe the Methods Used to Account for Bad Debts Two methods are used in accounting for uncollectible accounts: 1. Direct Write-off Method 2. Allowance Method h Direct write-off method h When a specific account is determined to be uncollectible, the loss is charged to Bad Debt Expense . h For example, assume that Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. The entry is: Dec. 12 Bad Debts Expense 200 Accounts Receivable--M. E. Doran200 (To record write-off of M. E. Duran account) h Bad debts expense will show only actual losses from uncollectibles. h Bad debts expense is often recorded in a period different from that in which the revenue was recorded. No attempt is made to show accounts receivable in the balance sheet at the amount actually expected to be received. h
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This note was uploaded on 03/01/2010 for the course ACCT 2301 taught by Professor White during the Spring '08 term at Central Texas College.

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Lecture Notes- Chapter 8 - Chapter 8 Reporting and...

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