Chapter07 UML 2007

Chapter07 UML 2007 - Ch. 7: Accounts Receivable 1 Chapter 7...

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Unformatted text preview: Ch. 7: Accounts Receivable 1 Chapter 7 Accounts Receivable In this chapter you will learn how accounts receivable affect businesses, how they are controlled, accounted for, and reported in financial statements. What Are Accounts Receivable? Accounts receivable are promises made by customers to pay for services or products they obtained from companies. For example, as discussed in previous chapters, when the Parks Computer Service Corporation provided services to some of its customers, the customers did not pay cash but, instead, promised to pay cash in the near future. In accounting terms, these promises are called accounts receivable. The accounts receivable were created when the company provided services to customers and the customers agreed to pay. The key element of accounts receivable is they are resources the company can use. In terms of the accounting equation, accounts receivable are current assets as shown below. As you proceed through this text, additional assets, liabilities and stockholders' equity accounts will be added to the accounting equation. The numbers in parentheses refer to the chapters in which the accounts are discussed. Assets Current Assets Cash and cash equivalents (6) Accounts receivable (7) = Liabilities + Stockholders' Equity Operating Expenses Bank Service Expense (6) Other Revenues & Expenses Interest Revenue (6) Interest Expense (6) The amount of accounts receivable differs from company to company and from year to year within a given company. Exhibit 7-1 presents accounts receivable for different companies and compares the accounts receivable to the companies' total assets. As the data show, there are many differences among the companies. For example, notice Time Warner's accounts receivable were $6.2 billion and represented only 4.7% of the companys resources, while PepsiCos $3.7 billion of accounts receivable represented 12.4% of the companys resources. Exhibit 7-1 Accounts Receivable ($ millions) December 31, 2006 Company Business Accounts Receivable Total Assets Percent PepsiCo Food and Drink $3,725 $29,930 12.4 Pfizer Drugs $9,392 $114,83 7 8.2 Time Warner Media $6,151 $131,66 9 4.7 Sources of Accounts Receivable Accounts receivable are created when a company provides services to customers and the customers agree to pay. For example, when a company provides 2 Ch. 7: Accounts Receivable $800 of services on February 1, the company records an increase in its resources (accounts receivable) and an increase in its sources of resources (stockholders equity, through fees revenue). Ch. 7: Accounts Receivable 3 Total Resources = Sources of Borrowed Resources + Sources of Owner Invested Resources + Sources of Management Generated Resources Assets = Liabilities + Stockholders' Equity + $800 = + $800 If you remember assets increase with debits and a journal entry must have debits equal to credits, the process of recording the transaction is quite simple, as shown below....
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.

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Chapter07 UML 2007 - Ch. 7: Accounts Receivable 1 Chapter 7...

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