LESSON 8 - Lesson 8 Analyzing Accounting for and Reporting...

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Unformatted text preview: Lesson 8: Analyzing, Accounting for, and Reporting Receivables Types of Receivables Receivables are cash amounts due from individuals or other companies. There are two major classes of receivables that we focus on in this Lesson: Accounts Receivable- amounts owed by customers on account where the amounts are expected to be collected within 30-60 days Notes Receivable- claims for which formal instruments of credit are issued Accounting for Accounts Receivable As you learned in Lesson 2, one of the most important current asset accounts is Accounts Receivable, which is recorded when a company makes a sale of its inventory or performs services on account (that is, with credit terms ). When the selling company extends the customer (the buying company) credit on a sale, the customer (buyer) gets the goods now and, by the terms stated in the purchaser’s Purchase Order (and also in the sellers Sales Order), pays for the goods within 30-60 days. As you have learned, the credit terms are stated in a standard format, such as “4/15 – n60” which means the customer may take a 4-percent discount, if he/she makes the cash payment owed on account within 15 days from the date on the seller’s Invoice; otherwise, the full amount is due 60 days from the invoice date. During the time the customer owes the seller for the cost of the delivered goods, the customer (the buying company) records a current liability called Accounts Payable , and the seller records a current asset called Accounts Receivable , both recorded at the same amount: the seller’s price which is also the buyer’s cost of the goods purchased or the services rendered. Later when the customer (the purchasing company) pays the selling company in cash (writes a check to the selling company) for the Accounts Payable it owes, the customer (buying company) eliminates its Accounts Payable debt to the selling company; and when the selling company receives the payment, it erases its Accounts Receivable due from the customer (the purchasing company). The selling company’s Accounts Receivable journal entries for a sale on account are the “mirror image” of the customer’s (the buying company’s) Accounts Payable journal entries. Recall that in Lesson 2 you compared the description of Accounts Receivable given above to the FASB definition of an Asset, and found that Accounts Receivable meets the “ probable future benefits” requirement of the definition. The Supplier will receive the cash payment in the future when their customers pay the amount owed, so the “future benefits” part is satisfied. Without the word “ probable ” in the definition, we could not classify Accounts Receivable as an Asset, because there is some uncertainty about whether the customers will actually pay the amount owed. But, since “probable” is included in the FASB definition of “future benefits”, we are correct to classify Accounts Receivables as an asset. In this Lesson, you will learn to account for the probability (or risk) the customers may not actually pay the amount they owe....
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This note was uploaded on 07/16/2010 for the course ACCT 2302 taught by Professor Dr.winking during the Spring '10 term at Tulane.

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LESSON 8 - Lesson 8 Analyzing Accounting for and Reporting...

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