Accounting Principles Second Canadian Edition Weygandt · Kieso · Kimmel · Trenholm Prepared by: Carole Bowman, Sheridan College CHAPTER ACCOUNTING FOR RECEIVABLES RECEIVABLES • The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash • Three major classes of receivables are: Accounts Receivable Notes Receivable Other Receivables ACCOUNTS RECEIVABLE The three primary accounting problems associated with accounts receivable are: Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL Date July Account Titles and Explanation Accounts Receivable - Adorable Junior Sales To record sales on account Debit Credit 1,000 When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited 1,000 RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL Date July Account Titles and Explanation Sales Returns and Allowances Accounts Receivable - Adorable To record merchandise returned Debit Credit 100 100 When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL Date July 31 Account Titles and Explanation Cash ($1,000 - $100) Accounts Receivable - Adorable To record collection of account Debit Credit 900 900 When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited RECOGNIZING ACCOUNTS RECEIVABLE GENERAL JOURNAL Date July 31 Account Titles and Explanation Accounts Receivable - Adorable Interest Revenue To record interest on amount due Debit Credit 13.50 13.50 When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited VALUING ACCOUNTS RECEIVABLE • To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value • Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect VALUING ACCOUNTS RECEIVABLE • Two methods of accounting for uncollectible accounts are: Allowance method Direct write-off method NON-BANK CARD SALES • Sales using American Express and other non-bank cards are reported as credit sales, not cash sales • Conversion into cash does not occur until American Express remits the net amount to the seller NON-BANK CARD SALES GENERAL JOURNAL Date July 31 Account Titles and Explanation Accounts Receivable Credit Card Expense ($500 x 5%) Sales To record American Express credit card sales Kerr Music Co accepts an AMERICAN EXPRESS card for a $500 sale The service fee that AMERICAN EXPRESS charges is percent Debit Credit 475 25 NOTES RECEIVABLE • A promissory note is a written promise to pay a specified amount of money on demand or at a definite time • The party making the promise is the maker • The party to whom payment is made is called the payee ILLUSTRATION 9-8 FORMULA FOR CALCULATING INTEREST The basic formula for calculating interest on an interest-bearing note is: Face Value of Note X Annual Interest Rate X Time in Terms of One Year = Interest RECOGNIZING NOTES RECEIVABLE GENERAL JOURNAL Date Account Titles and Explanation May Notes Receivable Accounts Receivable — Brent Company To record acceptance of Brent Company note Debit Credit 1,000 Wilma Company receives a $1,000, 6% promissory note, due in two months (July 31) from Brent Company to settle an open account 1,000 VALUING NOTES RECEIVABLE • Like accounts receivable, short-term notes receivable are reported at their net realizable value • The notes receivable allowance account is Allowance for Doubtful Notes HONOUR OF NOTES RECEIVABLE GENERAL JOURNAL Date Account Title and Explanation Sept 30 Cash Notes Receivable - Higly Interest Revenue To record collection of Higly note Debit Credit 10,150 10,000 150 • A note is honoured when it is paid in full at its maturity date • Wolder Co lends Higly Inc $10,000 on June 1, accepting a 4.5% interest-bearing note, due in months, on September 30 • Wolder collects the maturity value of the note from Higley on September 30 DISHONOUR OF NOTES RECEIVABLE GENERAL JOURNAL Date Account Title and Explanation Sept 30 Accounts Receivable - Higly Notes Receivable - Higly Interest Revenue To record the dishonour of Higly note Debit Credit 10,150 10,000 150 • A dishonoured note is a note that is not paid in full at maturity • A dishonoured note receivable is no longer negotiable • Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable BALANCE SHEET PRESENTATION OF RECEIVABLES • Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements • In the balance sheet, short-term receivables are reported within the current assets section below cash and temporary investments • Both the gross amount of receivables and the allowance for doubtful accounts should be reported USING THE INFORMATION IN THE FINANCIAL STATEMENTS • Financial ratios are calculated to evaluate the short-term liquidity of a company • These ratios include the current ratio, acid test (quick) ratio, receivables turnover ratio, and the collection period ratio CURRENT RATIO • The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability CURRENT ASSETS CURRENT RATIO = —— ————————— CURRENT LIABILITIES ACID TEST RATIO • The acid test ratio (quick ratio) is a measure of a company’s short-term liquidity CASH + TEMPORARY INVESTMENTS + RECEIVABLES (NET) ACID TEST RATIO = ———————————————————————————— CURRENT LIABILITIES ACCOUNTS RECEIVABLE TURNOVER RATIO • The ratio used to assess the liquidity of the receivables is the receivables turnover ratio Net Credit Sales ÷ Average Net Receivables = Receivables Turnover COLLECTION PERIOD • The collection period in days is a variant of the receivables turnover ratio and makes liquidity even more evident • The general rule is that the collection period should not exceed the credit term period Days in Year (365) ÷ Receivables Turnover = Collection Period in Days COPYRIGHT Copyright © 2002 John Wiley & Sons Canada, Ltd All rights reserved Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd The purchaser may make back-up copies for his / her own use only and not for distribution or resale The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein .. .CHAPTER ACCOUNTING FOR RECEIVABLES RECEIVABLES • The term receivables refers to amounts due from individuals... are: Accounts Receivable Notes Receivable Other Receivables ACCOUNTS RECEIVABLE The three primary accounting problems associated with accounts receivable are: Recognizing accounts receivable Valuing... company estimates it will not be able to collect VALUING ACCOUNTS RECEIVABLE • Two methods of accounting for uncollectible accounts are: Allowance method Direct write-off method DIRECT WRITE-OFF