Reporting and analyzing receivables

Chapter Accounting for Receivables • A receivable is a company’s claims for money, goods, or services • An account receivable is classified as a current asset representing money due for services performed or merchandise sold on credit • When an account becomes uncollectible, a bad debt expense is incurred Example: Accounts Receivable Assume merchandise is sold on account for $1,000 The terms of the agreement were 2/10, n/30 The entries are as follows: Example: Accounts Receivable Assume merchandise is sold on account for $1,000 The terms of the agreement were 2/10, n/30 The entries are as follows: Credit Sale: Accounts Receivable Sales Revenue 1,000 1,000 Example: Accounts Receivable Assume merchandise is sold on account for $1,000 The terms of the agreement were 2/10, n/30 The entries are as follows: Credit Sale: Accounts Receivable 1,000 Sales Revenue 1,000 Collection 2/10,n/30: Cash Sales Discounts Accounts Receivable 1,000 980 20 Uncollectible Accounts Some receivables will never be collected and must be written off as uncollectible Uncollectible Accounts • Occurs when customers not pay for items or services purchased on credit • Bad Debts are uncollectible accounts receivables • The uncollectible expense is placed on the income statement as a selling expense Two Methods of Accounting for Uncollectible Accounts •Direct Method Or: •Allowance Method EXAMPLE: If We Have $100,000 in A/R Invoice ABC Inc $ They would be represented by a stack of invoices Under the Direct Method • All invoices are presumed to be good • (Valued at $100,000) • until we discover someone can’t pay the amount owed Direct Method Invoice ABC Inc $ • When an invoice is discovered to be uncollectible — it must be removed from A/R • That is it must be expensed or written off Assessing Management of Receivables • Accounts Receivable Turnover • Number of Days in Receivables A measure of the average number of days it takes to collect a credit sale It is computed by dividing 365 days by the accounts receivable turnover Example The Wheeler Company had Net Credit Sales of $150,000 during 2009 The accounts receivables increased $5,000 to $40,000 during the same time Calculate the Accounts Receivable Turnover and Number of Days in Receivables Example The Wheeler Company had Net Credit Sales of $150,000 during 2009 The accounts receivables increased $5,000 to $40,000 during the same time Calculate the Accounts Receivable Turnover and Number of Days in Receivables Accounts Receivable Turnover: Net Sales Average Accounts Receivable $150,000 = 4.0 $ 37,500 Example The Wheeler Company had Net Credit Sales of $150,000 during 2009 The accounts receivables increased $5,000 to $40,000 during the same time Calculate the Accounts Receivable Turnover and Number of Days in Receivables Number of Days in Receivables: Number of Days Accounts Receivable Turnover 365 = 91.25 4.0 Notes Receivable • A written promise that allows someone to pay a certain amount of money on or before a specific future date • Notes are classified as current or longterm assets, depending on the due date Notes Receivable Components • Maker The individual who signs the note and assumes responsibility • Payee The person to whom payment is made • Principal The face amount of the note • Maturity Date The date the note becomes due • Interest Rate Annualized percentage of the principal the maker is charged to borrow money • Interest The cost of borrowing money Computing Interest Principal (amount) Computing Interest Principal (amount) X Interest Rate (%) Computing Interest Principal (amount) X Interest Rate (%) X Time (years) Computing Interest Principal (amount) X Interest Rate (%) Equals Interest Owed X Time (years) Example: Interest The Ohio Company signed a 90-day, $5,000 note payable to the Florida Company in settlement of existing accounts payable The interest rate of the agreement is 14 percent Calculate the interest cost Example: Interest The Ohio Company signed a 90-day, $5,000 note payable to the Florida Company in settlement of existing accounts payable The interest rate of the agreement is 14 percent Calculate the interest cost Principal x Interest Rate x Time = Interest $5,000 x 0.14 x 90/365 = $172.60 What journal entries are required for the Ohio Company? For the Virginia Company? Journalizing Notes Receivable The Ohio Company Maker Accept Note: Accounts Payable 5,000.00 Note Payable 5,000.00 Pay Note Plus Interest: Note Payable 5,000.00 Interest Expense 172.60 Cash 5,172.60 Journalizing Notes Receivable The Virginia Company Payee Accept Note: Note Receivable 5,000.00 Accounts Receivable 5,000.00 Collect Note Plus Interest: Cash 5,172.60 Note Receivable 5,000.00 Interest Revenue 172.60 Selling or Factoring Receivables • Receivables are sold to factoring companies for cash • The factoring companies charge a percentage of the receivable as a service cost • Factoring allows companies to receive cash now, instead of waiting to collect on the receivable [...]... amount, but don’t remove any invoices from A/R Allowance Method • An estimate can be based on: a) b) c) d) Size of the receivables Age of the receivables Past loss experience All of the above Allowance Method • An estimate can be based on: a) b) c) d) Size of the receivables Age of the receivables Past loss experience All of the above Allowance Method Assume you made an estimate that $2000 will not be... subtracted from accounts receivable on the balance sheet (2) The actual write-off entry does not reduce net receivables, as shown below: Acct Receivable $100,000 Less Allowance for Doubtful Accounts 2,000 1,500 Net Receivables $ 98,000 Acct Receivable $99,500 Less Allowance for Doubtful Accounts Net Receivables $98,000 Allowance Method (1) The Allowance for Doubtful Accounts is a contra-asset account which... actual write-off entry does not reduce net receivables (3) The estimation error inherent in this approach is more acceptable than the violation of matching with the direct write-off method Reversing Written-Off Receivables Reverse Write Off: Accounts Receivable 500 Allowance for Doubtful Accounts To reinstate a written-off receivable 500 Reversing Written-Off Receivables Reverse Write Off: Accounts Receivable... Estimating the Allowance for Uncollectible Accounts • Percentage of Total Receivables- Determines the desired balance for Allowance for Doubtful Accounts The difference between the actual and the desired balance is the expense entry • Aging Method The process of categorizing each account receivable by the number of days it has been outstanding Example: Bad Debt Expense The ABC company had credit sales of... Expense 980 980 Expense End Bal 980 1,130 End Bal Uncollectible Account Expense 980 Allowance for Doubtful Accounts 980 To adjust the Allowance account to desired balance Accounting for Uncollectible Receivables (Percentage of Credit Sales) The ABC company had credit sales during the year of $100,000 They estimate that 3% of all credit sales will be uncollectible Assuming the allowance for doubtful ... Size of the receivables Age of the receivables Past loss experience All of the above Allowance Method • An estimate can be based on: a) b) c) d) Size of the receivables Age of the receivables. .. Receivable Assume merchandise is sold on account for $1,000 The terms of the agreement were 2/10, n/30 The entries are as follows: Example: Accounts Receivable Assume merchandise is sold on account... Sales Discounts Accounts Receivable 1,000 980 20 Uncollectible Accounts Some receivables will never be collected and must be written off as uncollectible Uncollectible Accounts • Occurs when