Reporting and Analyzing ReceivablesC H A P T E R 7
RECEIVABLESAmounts Due from another party.Most common receivables are:1.Accounts Receivable2.Notes Receivable
Accounts ReceivableAmounts due from customers for credit sales.Credit sales require:Maintaining a separate account receivable for each customer.Accounting for bad debts (uncollectible accounts) that result from credit sales.
CREDIT SALES1.Direct Credit Sales to Customers2.Credit Card Sales
On Feb 13, UGA Company sells $500 of merchandise on credit to Jack, and $700 of merchandise on credit to JillSales on Credit to CustomersFeb 13 Accounts Receivable-Jack 500Sales500Feb 13 Accounts Receivable-Jill700Sales700
On Feb 23, UGA Company collects $300 from Jack and $400 from Jill on account. Sales on Credit to CustomersFeb 23 Cash300Accounts Receivable- Jack300Feb 23 Cash400Accounts Receivable- Jill400
With bank credit cards, the sellerdeposits the credit card sales receiptin the bank just like it deposits a customer’s check.The bank increases the balance in thecompany’s checking account.The company usually pays a fee of 1%to 5% for the service.Credit Card Sales
Credit Card SalesAccounting for Credit Card Sales depends upon when Cash will be received from the Sale…..1. Immediate on deposit of Credit Card Receipt. OR2. Delayed until Credit Card Company makes payment.
On Feb 13, UGA Company has a bank credit card sale of $500 to a customer. The bank charges a processing fee of 2%. The cash is received immediately.Credit Card SalesImmediate Payment…..Feb 13Cash490Credit Card Expense10Sales500
On Feb 13, UGA Company has a bank credit card sale of $500 to a customer. The bank charges a processing fee of 2%. UGA remits the credit card sale to the credit card company and waits for the payment that is received on Feb 25.Credit Card SalesWait for Payment….Feb. 13 A/R-Credit Card Co.490Credit Card Expense10Sales500Feb 25Cash490A/R- Credit Card Co.490
Valuing Accounts ReceivableSome customers may not pay their account. Uncollectible amounts are referred to as bad debts. When an account receivable becomes uncollectible, a firm incurs a bad debt loss.
Accounting for Uncollectible Accounts2 Methods:•Direct Write off•Allowance Method
Direct Write-Off MethodWrite off an account receivable as uncollectible when it is deemed to be uncollectible.
On Jan 1, we determine that we cannot collect $400 from Mr. Bad Guy, a credit customer.Direct Write-Off MethodTo write off a customer’s accountJan. 1Bad Debt Expense 400A/R- Bad Guy400
On April 1, Mr. Bad Guy decides to pay $200.Direct Write-Off MethodTo collect payment after account has been written off•First reinstate Account•Record receipt of paymentApril 1A/R- Bad Guy200Bad Debt Guy200April 1Cash200A/R- Bad Guy200
Matching vs. MaterialityMatching requires expenses to be reported in the same accounting period as the sales they help produce.