Cash and Receivables CURRENT RECEIVABLES Receivables are the amount owed to the organization by its customers and/or others. Current receivables will be collected within one year or the current operating cycle which ever is longer. Noncurrent receivables will be collected at some later date beyond the operating cycle. Trade receivables are those owed by customers in the ordinary course of business. Accounts receivable are promises to pay that are not supported by any written documents. Notes receivable are evidenced by a written note and normally carry an interest rate. ACCOUNTS RECEIVABLE Trade accounts receivable are evidenced by invoices that reflect the exchange price of the goods or services. This exchange price is affected by trade discounts and cash discounts. a.Trade discounts Trade discounts are typically quoted as a percentage of the list price of the item. This allows the seller to give the buyer a discount without having to adjust the list price. The account receivable is recorded on the seller’s books at the amount net of the trade discount. b.Cash discounts (sales discounts) Cash or sales discounts are incentives offered to the buyer to pay the invoice early. They are typically quoted as a percentage discount on the invoice price is paid within a limited period of time. For example, if the terms are 2/10, net/30. The buyer can take a 2% discount on the invoice price if the invoice is paid within the first 10 days. If the invoice is not paid within 10 days then the total amount is due on the 30thday. Most business organizations use the gross method for recording cash discounts. Under this method the total invoice is booked as an account receivable. At the time the payment is received the discount is recorded. Example:assume that Spencer Company sold $10,000 worth of merchandise to Sophie Company under terms of 2/10, net/30. Within the first 10 days Sophie Company pays the invoice less the 2% discount. The following reflects the journal entries to record the sale and the collection on Spencer Company’s books. ACCOUNT DEBIT CREDIT Accounts receivable 10,000 Sales 10,000 To record the sale of merchandise to Sophie Company Cash 9,800 Sales discounts 200 Accounts receivable 10,000 To record the collection of the receivable from Sophie Company net of the 2% discount Valuation of Accounts Receivable F:\Teaching\3321\web\module3\c7\tnotes\C7b.doc 2/16/2007 1
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