CHAPTER

ACCOUNTS RECEIVABLES

Chapter
8-1

Receivables
Receivables
Claims held against customers and others
money, goods, or services.

for

Oral promises of the

purchaser to pay for
goods and services sold.

Written promises to pay

a sum of money on a
specified future date.

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

Chapter
8-2

LO 3 Define receivables and identify the different types of receivables.

Receivables
Receivables
Nontrade Receivables
1.
2.
3.
4.
5.
6.

Advances to officers and employees.

Advances to subsidiaries.
Deposits to cover potential damages or losses.
Deposits as a guarantee of performance or payment.
Dividends and interest receivable.
Claims against:
a)
b)
c)
d)
e)
f)

Chapter
8-3

Insurance companies for casualties sustained.

Defendants under suit.
Governmental bodies for tax refunds.
Common carriers for damaged or lost goods.
Creditors for returned, damaged, or lost goods.
Customers for returnable items (crates, containers, etc.).

LO 3 Define receivables and identify the different types of receivables.

Receivables
Receivables
Nontrade Receivables
Illustration 7-3

Chapter
8-4

LO 3 Define receivables and identify the different types of receivables.

Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the gross method.
June 3

Accounts receivable

2,000

Sales
June 12

Cash ($2,000 x 98%)

Sales discounts
Accounts receivable

Chapter
8-5

2,000
1,960
40
2,000

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
How
How are
are these
these accounts
accounts presented
presented on
on the
the Balance
Balance
Sheet?
Sheet?

Accounts Receivable

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

Chapter
8-6

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable

Chapter
8-7

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable

Chapter
8-8

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Journal
Journal entry
entry for
for credit
credit sale
sale of
of $100?
$100?
Accounts
100
Accounts receivable
receivable
100
Sales
Sales
Accounts Receivable

100
100

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

Chapter
8-9

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Journal
Journal entry
entry for
for credit
credit sale
sale of
of $100?
$100?
Accounts
100
Accounts receivable
receivable
100
Sales
Sales
Accounts Receivable
Beg.

500

Sale

100

End.

600

Chapter
8-10

100
100

Allowance for
Doubtful Accounts
25

Beg.

25

End.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Collected
Collected of
of $333
$333 on
on account?
account?
Cash
Cash
Accounts
Accounts receivable
receivable
Accounts Receivable
Beg.

500

Sale

100

End.

600

Chapter
8-11

333
333

333
333

Allowance for
Doubtful Accounts
25

Beg.

25

End.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Collected
Collected of
of $333
$333 on
on account?
account?
Cash
Cash
Accounts
Accounts receivable
receivable
Accounts Receivable
Beg.

500

Sale

100

End.

267

Chapter
8-12

333

333
333

333
333

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Adjustment
Adjustment of
of $15
$15 for
for estimated
estimated Bad-Debts?
Bad-Debts?
Bad
15
Bad debt
debt expense
expense
15
Allowance
Allowance for
for Doubtful
Doubtful Accounts
Accounts
Accounts Receivable
Beg.

500

Sale

100

End.

267

Chapter
8-13

333

15
15

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Adjustment
Adjustment of
of $15
$15 for
for estimated
estimated Bad-Debts?
Bad-Debts?
Bad
15
Bad debt
debt expense
expense
15
Allowance
Allowance for
for Doubtful
Doubtful Accounts
Accounts
Accounts Receivable
Beg.

500

Sale

100

End.

267

Chapter
8-14

333

Coll.

15
15

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Write-off
Write-off of
of uncollectible
uncollectible accounts
accounts for
for $10?
$10?
Allowance
10
Allowance for
for Doubtful
Doubtful accounts
accounts
10
Accounts
Accounts receivable
receivable
Accounts Receivable
Beg.

500

Sale

100

End.

267

Chapter
8-15

333

Coll.

10
10

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Write-off
Write-off of
of uncollectible
uncollectible accounts
accounts for
for $10?
$10?
Allowance
10
Allowance for
for Doubtful
Doubtful accounts
accounts
10
Accounts
Accounts receivable
receivable
Accounts Receivable
Beg.

500

Sale

100

End.
Chapter
8-16

257

333

Coll.

10

W/O

10
10

Allowance for
Doubtful Accounts

W/O

25

Beg.

15

Est.

30

End.

10

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable

Chapter
8-17

LO 4 Explain accounting issues related to recognition of accounts receivable.

Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Reporting Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected.

Chapter
8-18

LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Uncollectible Accounts Receivable
An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
a decrease in the asset accounts receivable and
a related decrease in income and stockholders equity.

Chapter
8-19

LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
net realizable value
Not GAAP

Chapter
8-20

Allowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-ofreceivables
GAAP

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Income
Income
Statement
Statement
Approach
Approach

Balance
Balance
Sheet
Sheet
Approach
Approach

Chapter
8-21

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Percentage-of-Sales Approach - matches costs with
revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship
between previous years credit sales and bad debts.

Chapter
8-22

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Percentage-of-Sales Approach
Illustration: Chad Shumway Corp.
estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Bad Debt Expense
Allowance for Doubtful Accounts

Chapter
8-23

8,000
8,000

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables Approach
not matching.
reports receivables at net realizable value.
Companies may apply this method using
one composite rate, or
an aging schedule of accounts receivable.

Chapter
8-24

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-25

37,650
37,650

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Bad Debt Expense ($37,650 $800)
Allowance for Doubtful Accounts
Chapter
8-26

36,850
36,850

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.

Chapter
8-27

LO 5 Explain accounting issues related to valuation of accounts receivable.

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.

Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (a) 1% of net sales.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-28

7,500
7,500

($800,000 $50,000) x 1% = $7,500

LO 5

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.

Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
8-29

6,000
6,000

($160,000 x 5%) $2,000) = $6,000

LO 5

Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Summary
Percentage of Sales approach:
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.

Percentage of Receivables approach:

Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.
Chapter
8-30

LO 5 Explain accounting issues related to valuation of accounts receivable.