Chap9 Class Notes 2010

Chap9 Class Notes 2010 - Chapter 9 I. Types of Receivables...

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Victor Leung 1 ACCT21111 Chapter 9 Chapter 9 I. Types of Receivables Receivables consist of a variety of money claims against customers and other parties. A. Accounts receivable claims on customers on account that arise from sales of merchandise or services on credit; expect to be collected in cash within 30 to 60 days; non-written promises to pay with only customer’s signature on a receipt or invoice as evidenced; company can sell (factor) its receivables to finance companies. B. Notes receivable claims on customers for which formal instruments of credit are issued as evidence of debt. give the payee a stronger legal claim than accounts receivable and be more readily sold to finance company. C. Other (Non-trade) receivables * not directly related to the sale of goods and services; * e.g. interest receivable, advance and loans to employees, insurance claims; separately listed on the balance sheet as Other Receivables. II. Valuation of Trade Receivable (Accounts Receivable and Notes Receivable (from sales transactions) 1. Value of the recorded receivables is based on the expected future cash flows. 2. Credit losses are normal and necessary risk of doing business. 3. Two major methods are used in accounting for uncollectible accounts direct write-off method allowance method . III. Direct Write Off Method (page 389, Illustration 9-1) bad debt losses are not anticipated; bad debt losses are recognised only when an account is actually uncollectible; assets are overstated and net income is overstated. not a GAAP , unless bad debts are insignificant and uncommon. e.g., write off an account receivable –AA Ltd. Feb 22 Bad Debts Expense. 4,000 Accounts Receivable (AA Ltd.) 4,000
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Victor Leung 2 ACCT21111 Chapter 9 IV. Allowance method 1. The only theoretically correct method 2. To ensure that receivables are not overstated on the balance sheet, they are stated at their cash (net) realizable value. Cash (net) realizable value is the net amount expected to receive in cash. 3. Needs to estimate the probability of collection. 4. Uncollectible accounts are then estimated 5. An year-end adjusting entry provides for recognition of uncollectible expense by debiting to Bad Debts Expense, reduction of the value of the accounts receivable by crediting to Allowance for Doubtful Accounts. When a specific account is believed to be uncollectible, it is written off by debiting to Allowance for Doubtful Accounts and crediting to Accounts Receivable. Allowance for Doubtful Accounts is a contra-asset account for Accounts Receivable with a normal credit balance. Balance Sheet (also, page 390) Accounts receivable $95,200 Less: Allowance for Doubtful Accounts 4,775 Accounts receivable, net $90,425 ====== Two bases are used to determine the amount of the expected uncollectible: (A) Percentage of Sales Basis and (B) Percentage of Receivables Basis. (A)
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Chap9 Class Notes 2010 - Chapter 9 I. Types of Receivables...

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