Chapter

Accounting for
Receivables

Chapter
9-1

Accounting Principles, Ninth Edition

Study Objectives
1.

Identify the different types of receivables.

2.

Explain how companies recognize accounts receivable.

3.

Distinguish between the methods and bases companies use to

value accounts receivable.

4.

Describe the entries to record the disposition of accounts

receivable.

5.

Compute the maturity date of and interest on notes receivable.

6.

Explain how companies recognize notes receivable.

7.

Describe how companies value notes receivable.

8.

Describe the entries to record the disposition of notes

receivable.

9.

Explain the statement presentation and analysis of receivables.

Chapter
9-2

Accounting for Receivables

Types of
Receivables
Accounts
receivable

Accounts
Receivable

Notes receivable

Recognizing
accounts
receivable

Other
receivables

Valuing accounts
receivable
Disposing of
accounts
receivable

Notes Receivable

Determining
maturity date
Computing
interest
Recognizing
notes receivable
Valuing notes
receivable
Disposing of notes
receivable

Chapter
9-3

Statement
Presentation and
Analysis
Presentation
Analysis

Types of Receivables
Amounts due from individuals and other companies that
are expected to be collected in cash.
Amounts owed by
customers that
result from the
sale of goods and
services.

Claims for which

formal
instruments of
credit are issued
as proof of debt.

Nontrade
(interest, loans to
officers, advances
to employees, and
income taxes
refundable).

Accounts
Receivable

Notes
Receivable

Other
Receivables

Chapter
9-4

SO 1 Identify the different types of receivables.

Accounts Receivable
Three accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5.
For simplicity, inventory and cost of goods sold have
been omitted.
Chapter
9-5

SO 1 Identify the different types of receivables.

Recognizing Accounts Receivable

Illustration: Assume that Jordache Co. on July 1, 2010, sells
merchandise on account to Polo Company for $1,000 terms
2/10, n/30. Prepare the journal entry to record this
transaction on the books of Jordache Co.
Jul. 1

Accounts receivable
Sales

Chapter
9-6

1,000
1,000

SO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts Receivable

Illustration: On July 5, Polo returns merchandise worth $100
to Jordache Co.
Jul. 5

Sales returns and allowances

100

Accounts receivable

100

Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.

Jul. 11

Cash

882

Sales discounts ($900 x .02)

Accounts receivable
Chapter
9-7

18
900

SO 2 Explain how companies recognize accounts receivable.

Accounts Receivable
Valuing Accounts Receivables
Are reported as a current asset on the balance
sheet.
Are reported at the amount the company thinks
they will be able to collect.
Sales on account raise the possibility of accounts
not being collected.
Valuation can be difficult because an unknown
amount of receivables will become uncollectible.
Chapter
9-8

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at
net realizable value.
not acceptable for
financial reporting.

Chapter
9-9

Allowance Method
Losses are estimated:
better matching.
receivable stated at net
realizable value.
required by GAAP.

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Presentation of Accounts Receivable

Assets
Current Assets:
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-10

$ 346
500
25

475
812
40
1,673

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Presentation of Accounts Receivable

Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-11

$ 346
475
812
40
1,673

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts
receivable.
2. To record estimated uncollectibles, companies
debit Bad Debts Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. When companies write off specific uncollectible
accounts, they debit Allowance for Doubtful
Accounts and credit Accounts Receivable.
Chapter
9-12

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2010. Of this
amount, $200,000 remains uncollected at December 31. The
credit manager estimates that $12,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31

Bad debt expense

12,000

Allowance for doubtful accounts

Chapter
9-13

12,000

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Illustration 9-2
Presentation of allowance for doubtful accounts

Chapter
9-14

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Recording the Write-Off of an Uncollectible Account:
Assume that the financial vice-president of Hampson Furniture
authorizes a write-off of the $500 balance owed by R.A.Ware
on March 1, 2011.The entry to record the write-off is:
Mar. 1

Allowance for doubtful accounts

Accounts receivable

500
500
Illustration 9-3

Chapter
9-15

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Recovery of an Uncollectible Account: Assume that on July
1, R. A. Ware pays the $500 amount that Hampson had written
off on March 1.These are the entries:
Jul. 1

Accounts receivable

500

Allowance for doubtful accounts

Jul. 1

Cash

500

Accounts receivable

Chapter
9-16

500

500

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Bases Used for Allowance Method
Illustration 9-5

Chapter
9-17

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net
credit sales will become uncollectible. If net credit sales for
2010 are $800,000, the adjusting entry is:
Dec. 31

Bad debts expense

Allowance for doubtful accounts

8,000 *
8,000

* $800,000 x 1%
Chapter
9-18

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Percentage-of-Sales
Emphasizes the matching of expenses with revenues.
When the company makes the adjusting entry, it
disregards the existing balance in Allowance for Doubtful
Accounts.
Illustration 9-6

Chapter
9-19

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Percentage-of-Receivables

Chapter
9-20

Illustration 9-7
Aging schedule

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Percentage-of-Receivables
Illustration: If the trial balance shows Allowance for
Doubtful Accounts with a credit balance of $528, the company
will make the following adjusting entry.
Dec. 31

Bad debts expense

Allowance for doubtful accounts

1,700 *
1,700

* $2,228 - 528
Chapter
9-21

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Percentage-of-Receivables
Illustration 9-8

Occasionally the allowance account will have a debit

balance prior to adjustment.

Chapter
9-22

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Summary
Percentage of Sales approach:
Focus on Bad debt expense estimate, existing
balance in the allowance account is ignored.

Method achieves a matching of cost and revenues.

Percentage of Receivables approach:

Accurate valuation of receivables on the balance sheet.
Method may also be applied using an aging schedule.
Existing balance in allowance account considered.
Chapter
9-23

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Disposing of Accounts Receivable

Companies sell receivables for two major
reasons.
1. Receivables may be the only reasonable source

of cash.

2. Billing and collection are often time-consuming

and costly.

Chapter
9-24

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable

Sale of Receivables
A factor buys receivables from businesses and then
collects the payments directly from the customers.
Typically the factor charges a commission to the
company that is selling the receivables.
The fee ranges from 1-3% of the amount of
receivables purchased.

Chapter
9-25

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable

Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon
Furniture is as follows.
($600,000 x 2% = $12,000)

Cash
Service charge expense
Accounts receivable

Chapter
9-26

588,000
12,000
600,000

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable

Credit Card Sales
Retailer considers credit card sales the same as cash
sales.
Retailer must pay card issuer a fee of 2 to 4%
for processing the transactions.
Retailer records the sale in a similar manner as
checks deposited from cash sale.

Chapter
9-27

SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable

Illustration: Anita Ferreri purchases $1,000 of compact
discs for her restaurant from Karen Kerr Music Co., using
her Visa First Bank Card. First Bank charges a service fee of
3%. The entry to record this transaction by Karen Kerr
Music is as follows.

Cash
Service charge expense
Sales

Chapter
9-28

970
30
1,000

SO 4 Describe the entries to record the disposition of accounts receivable.

Notes Receivable
Companies may grant credit in exchange for a
promissory note. A promissory note is a written
promise to pay a specified amount of money on
demand or at a definite time.
Promissory notes may be used:
1. when individuals and companies lend or
borrow money,
2. when amount of transaction and credit

period exceed normal limits, or

3. in settlement of accounts receivable.

Chapter
9-29

SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 9-10

Chapter
9-30

SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable
Determining the Maturity Date
Note expressed in terms of
Months
Days

Computing Interest

Chapter
9-31

Illustration 9-13

SO 5 Compute the maturity date of and interest on notes receivable.

Recognizing Notes Receivable

Illustration: Assuming that Calhoun Company wrote $1,000,
two-month, 12% promissory note to settle an open account,
Wilma Company makes the following entry for the receipt of
the note.

Notes receivable
Accounts receivable

Chapter
9-32

1,000
1,000

SO 6 Explain how companies recognize notes receivable.

Notes Receivable
Valuing Notes Receivable
Like accounts receivable, companies report shortterm notes receivable at their cash (net)
realizable value.
Estimation of cash realizable value and bad debts
expense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.

Chapter
9-33

SO 7 Describe how companies value notes receivable.

Notes Receivable
Disposing of Notes Receivable
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an

adjustment to the account.

3. Holder speeds up conversion to cash by selling

the note receivable.

Chapter
9-34

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable
Disposing of Notes Receivable
Honor of Notes Receivable
A note is honored when its maker pays it in full
at its maturity date.
Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity.

A dishonored note receivable is no longer
negotiable.
Chapter
9-35

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable
Honor of Notes Receivables
Illustration: Assume that Betty Co. lends Wayne Higley Inc.
$10,000 on June 1, accepting a five-month, 9% interestbearing note. Assuming that Betty Co. presents the note to
Wayne Higley Inc. on the maturity date, Betty Co.s entry to
record the collection is:
Nov. 1

Chapter
9-36

Cash

10,375

Notes receivable

10,000

Interest revenue

375

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable
Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would make
an adjusting entry to record 4 months interest.
Sept. 30

Interest receivable

Interest revenue

Chapter
9-37

300
300

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable
Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring
of the Wayne Higley Inc. note on November 1 is:
Nov. 1

Cash
Notes receivable
Interest receivable
Interest revenue

Chapter
9-38

10,375
10,000
300
75

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable
Dishonor of Notes Receivables
Illustration: Assume that Wayne Higley Inc. on November 1
indicates that it cannot pay at the present time. If Betty Co.
does expect eventual collection, it would make the following
entry at the time the note is dishonored (assuming no previous
accrual of interest).
Nov. 1

Chapter
9-39

Accounts receivable

10,375

Notes receivable

10,000

Interest revenue

375

SO 8 Describe the entries to record the disposition of notes receivable.

Statement Presentation and Analysis

Presentation
Identify in the balance sheet or in the notes each
major type of receivable.
B/S

Report short-term receivables as current assets.

Report both gross amount of receivables and
allowance for doubtful account.

I/S

Chapter
9-40

Report bad debts expense and service charge

expense as selling expenses.
Report interest revenue under Other revenues
and gains.
SO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Analysis of Receivables
Illustration 9-15

This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Chapter
9-41

SO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Analysis of Receivables
Illustration 9-16

Variant of the accounts receivable turnover ratio is average

collection period in terms of days.
Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.
Chapter
9-42

SO 9 Explain the statement presentation and analysis of receivables.

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Chapter
9-43