ĐH MỞ BÀI GIẢNG RECEIVABLES Chapter 7

Vũ Quốc Thông (PhD.) 10/10/2020 Chapter Vũ Quốc Thông (PhD.)  Summarise and provide examples of internal control procedures that apply to receivables  Describe the nature of and the accounting for bad debts and doubtful debts Vũ Quốc Thông (PhD.) 10/10/2020  Classification of Receivables  Internal Control of Receivables  Uncollectible Receivables  Allowance (Provision) Method  Direct Write-off Method Receivables = money owing to the business by other entities Account Receivable  Notes Receivable  Other Receivable  Vũ Quốc Thông (PhD.) 10/10/2020  Account Receivable Result from selling goods or providing services on credit  Normally collected within a short period such as 30 or 60 days   Notes Receivable Amounts that customers owe, for which a formal written agreement has been issued  Interest is required   Note Receivable and Accounts Receivable are sometimes called Trade Receivables Vũ Quốc Thông (PhD.) 10/10/2020  Other Receivables Shown separately on the balance sheet  Include interest receivable and receivables from employees  Customer PO Payment Credit Approval Goods or Services Collecting Invoice Receipt Notes Sales Accounting Information flow in a business for sale activities Vũ Quốc Thông (PhD.) 10/10/2020  Segregation of duties (employee responsible for sales and employee doing the accounting for the receivables)  Approving credit  Reconciliation frequently (Receivables outstanding and receipt notes)  Collecting policy  Common fraudulences: Lapping  Fake documents  Do not write-off received amounts  Vũ Quốc Thông (PhD.) 10/10/2020  Sometimes, receivables will not be (or cannot be) collected  These amount can be limited by the creditgranting function  When receivables become uncollectible, outstanding receivables balances will be converted into expense  Bad debt: confirmed uncollectible receivables  Doubtful debt: potential bad debts  Under prudence principle, expected losses to be recognised in the accounting books as soon as possible  These losses will be recorded through: provision method or direct write-off method Vũ Quốc Thông (PhD.) 10/10/2020  Estimates the expense for uncollectible receivables even before the account is confirmed to be worthless  Example: At the year end, company A’s receivable balance is $10,000 (made of from several customers and this amount is past due) Company estimate that 5% of this balance will become worthless What is the accounting treatment for this estimation?  Company need to open a Provision for Doubtful Debt account because: This amount is an estimation  This amount cannot be credited (decrease) to specific customer   This account is a contra asset account Dr Doubtful Debts Expense  Cr Provision for Doubtful Debts  $500 $500 Vũ Quốc Thông (PhD.) 10/10/2020  What happen when bad debts arise after the provision for doubtful debts was set up?  How doubtful debts are estimated?  Recognises the expense only when accounts are confirmed to be worthless A provision account is not needed Company will directly write-off the bad debts to an expense account  This method is used when uncollectible amount is impossible to estimate and small Vũ Quốc Thông (PhD.) 10/10/2020  Matching (p 317)  Multiple choice (p 317)