Receivables are normally classified as (1)
accounts receivable, (2) notes receivable, or
(3) other receivables.
Transactions in which merchandise is sold
or services are provided on credit generate
Examples of other receivables include inter-
est receivable, taxes receivable, and recei-
vables from officers or employees.
Gallatin Hardware should use the direct
write-off method because it is a small busi-
ness that has a relatively small number and
volume of accounts receivable.
The allowance method
Contra asset, credit balance
The accounts receivable and allowance for
doubtful accounts may be reported at a net
amount of $266,950 ($298,150 – $31,200) in
the Current Assets section of the balance
sheet. In this case, the amount of the allow-
ance for doubtful accounts should be shown
separately in a note to the financial state-
ments or in parentheses on the balance
sheet. Alternatively, the accounts receivable
may be shown at the gross amount of
$298,150 less the amount of the allowance
for doubtful accounts of $31,200, thus yield-
ing net accounts receivable of $266,950.
The percentage rate used is excessive
in relationship to the volume of accounts
written off as uncollectible; hence, the
balance in the allowance is excessive.
A substantial volume of old uncollectible
accounts is still being carried in the ac-
counts receivable account.
An estimate based on analysis of recei-
vables provides the most accurate estimate
of the current net realizable value.
The advantages of a claim evidenced by a
note are that (1) the debt is acknowledged,
(2) the payment terms are specified, (3) it is
a stronger claim in the event of court action,
and (4) it is usually more readily transferable
to a creditor in settlement of a debt or to a
bank for cash.
The interest will amount to $6,300 only if the
note is payable one year from the date it
was created. The usual practice is to state
the interest rate in terms of an annual rate,
rather than in terms of the period covered by
Debit Accounts Receivable
Credit Notes Receivable
Credit Interest Revenue
Accounts Receivable .
Interest Revenue .
($10,200 × 30/360 × 10% = $85)