Documente Academic
Documente Profesional
Documente Cultură
of a Business
Assume that Acme Manufacturing sold merchandise to
Harper Company on account.
When the inventory is sold on account:
Accounts Receivable 1,000
Sales 1,000
Sold merchandise to Harper
Company on account.
When the collection takes place:
Cash 1,000
Accounts Receivable 1,000
Payment received on account.
The Operating Cycle 3
of a Business
Receivables are all claims against other
entities. They are usually settled in cash.
Trade receivables: Receivables arising from
normal operating activities.
Notes receivable: Trade receivables evidenced
by a formal written promise to pay.
Nontrade receivables: All receivables arising
from activities other than normal operations.
The Operating Cycle 4
of a Business
Nontrade receivables arise from a variety
of transactions, such as
(1) The sale of securities or property other
than inventory
(2) Deposits to guarantee contract
performance or expense payments
(3) Claims for rebates and tax refunds
(4) Dividends and interest receivable
5
5
Accounting for
Receivable
Recognizing accounts receivable
Valuing accounts receivable
Disposing of account receivable
6
Uncollectible A/R
Since
This
Thisthis
Since entry
this determination
entry isis made
made when
determination when was
the
wasthemade
account
made after
account has
after the
hasthe
been
period
been determined
period in
in which
whichuncollectible.
determined the
the sale
sale takes
uncollectible.takes place,
The
The direct
place, the
direct
the
matching
write-off
write-offprinciple
matching method
method isis
principle isisused
violated.
used by
by small
violated. This
small
This
method
businesses
method isis not
businesses because
not accepted
because
acceptedofof its
under
its simplicity.
under GAAP.
simplicity.
GAAP.
9
GAAP
GAAPrequires
requires the
the use
use of
of the
the
allowance
allowance method.
method.
11
Accounting for Uncollectible
Receivables (Allowance Method)
When the account is then determined to be
uncollectible, the write-off entry is:
Allowance for Bad Debts 400
Accounts Receivable 400
To write off an uncollectible
account.
Note:
Note: Bad
Bad Debt
Debt Expense
Expense isis not
not debited.
debited.
12
Accounting for Uncollectible
Receivables (Allowance Method)
What happens if the written off receivable is
later collected? Assume that the customer from
Slide 22 pays the $400 written-off debt a month
after the write-off.
Accounts Receivable 400
Allowance for Bad Debts 400
To reverse the entry made to
write off the account.
Note:
Note: Before
Before the
the payment
payment entry,
entry, the
the debt
debt
must
must be
be restored.
restored.
13
Accounting for Uncollectible
Receivables (Allowance Method)
What happens if the written off receivable is
later collected? Assume that the customer from
Slide 22 pays the $400 written-off debt a month
after the write-off.
Cash 400
Accounts Receivable 400
To record collection of the
account.
14
Accounting for Uncollectible
Receivables (Allowance Method)
(1) Allowance for Bad Debt is a
contra-asset account which is subtracted from
Accounts Receivable on the balance sheet.
2)The actual write-off entry for $400 does not reduce
net receivables, as shown below:
Percentage of credit
sales
Percentage of accounts
receivable
Aging receivables
16
Percentage
Example: of Credit
Doubtful Sales
Accounts Expense
The
The ABC
ABC company
company had had credit
credit sales
sales of
of
$100,000.
$100,000. The
The current
current accounts
accounts
receivable
receivable balance
balance isis $30,500.
$30,500. TheThe
allowance
allowance for
for doubtful
doubtful accounts
accounts balance
balance isis
$350.
$350. Historically,
Historically,22 percent
percent of
of the
the credit
credit
sales
sales are
are not
not collected.
collected.
What
What isis the
the entry
entry to
to record
record estimated
estimated bad
bad debts?
debts?
17
Percentage
Example: of Credit
Doubtful Sales
Accounts Expense
The
The ABC
ABC company
company had had credit
credit sales
sales of
of
$100,000.
$100,000. The
The current
current accounts
accounts
receivable
receivable balance
balance isis $30,500.
$30,500. TheThe
allowance
allowance for
for doubtful
doubtful accounts
accounts balance
balance isis
$350.
$350. Historically,
Historically,22 percent
percent of
of the
the credit
credit
sales
sales are
are not
not collected.
collected.
Percentage of Accounts
Example: Doubtful Receivable
Accounts Expense
The
The XYZ
XYZ company
company had had credit
credit sales
sales of
of
$693,000.
$693,000. The
The current
current accounts
accounts
receivable
receivable balance
balance isis $50,000.
$50,000. TheThe
allowance
allowance account
account balance
balance isis $600.
$600.
Historically,
Historically, 33 percent
percent of
of accounts
accounts
receivable
receivable are
are not
not collectible.
collectible.
What
What isis the
the required
required adjusting
adjusting entry
entry to
to
record
record estimated
estimated bad
bad debts?
debts?
20
Allowance
IIWhat
see!
see! if
What The
if
Thethefor
the Doubtful
ending
allowance
ending Accounts
balance
allowance
balance
Balancemust
account
must be
be forced
account had
350aa debit
forced
had to
to be
debitbe the
Adjustingthe 1,850
balance
calculated
balance
calculated of
of $350?
amount.
$350?
amount.
Dec. 31, Bal. 1,500
23
Aging Receivables
The
The ABC
ABC company
company had had credit
credit sales
sales of
of
$100,000.
$100,000. The The current
current accounts
accounts
receivable
receivable balance
balance isis $47,550.
$47,550. TheThe
allowance
allowance forfor doubtful
doubtful accounts
accounts balance
balance isis
$620.
$620. The
The firm
firm ages
ages the
the accounts
accounts toto
determine
determine
Remember, the
the expected
expected
because uncollectibles.
uncollectibles.
receivables
Remember, because receivables are
are
involved,
involved, the
the amount
amount derived
derived from
from
aging
aging provides
provides thethe desired
desired balance
balance ofof
the
the allowance
allowance account.
account.
24
Aging Receivables
Uncollectible Estimated
Accounts Amount of
Classification Experience Uncollectible
(in days) Balance Percentage Accounts
Not yet due $40,000 2% $ 800
1-30 past due 3,000 5 150
31-60 past due 1,200 10 120
61-90 past due 650 20 130
91-180 past due 500 30 150
181-365 past due 800 50 400
+365 past due 1,400 1,120
$47,550 $2,870
25
Aging Receivables
Aging Receivables
Source of Cash
As
As aa sale
sale (either
(either with
with or
or
without
without recourse.
recourse.
As
As aa secured
secured borrowing.
borrowing.
Accounts Receivable as a 29
Source of Cash
SFAS 140 specified conditions that must be met if a
transfer of receivables is to be accounted for as a sale:
1. The transferred assets have been isolated from the
transferor and its creditors cannot access the assets.
2. The transferee has the right to pledge or exchange the
transferred assets.
3. The transferor does not maintain effective control
over the assets through either (a) an agreement to
repurchase them before their maturity or (b) the
ability to cause the transferee to return specific assets.
30
Accounts Receivable
from Factoring
Payment of Accounts
Factor
Factor
Sale of Accounts
Receivable
Receivable
Cash
Goods and
Services Provided
Customers Company
Accounts
Receivable
Established
Accounting for Factoring 31
Accounts Receivable
Close sold receivables
Close accompanying Allowance for Bad
Debts
Expense any factoring charges
Establish a receivable for any sales price
withheld by the factor
Debit Cash for net proceeds of the sale
Recognize a gain or loss from factoring
32
Example: Factoring
Accounts Receivable
Assume that Hendredon Furniture factors $600 of receivables
to Federal Factors, Inc. Federal Factors assesses a service
charge of 2% of the amount of receivables sold.
Cash 588,000
Service Charge 12,000
A/R 600,000
(To record the sale of A/R)
Example: Factoring 33
Accounts Receivable
Assume:
Factored Receivables $10,000
Allowance for Bad Debts 300
Factor Withholding 5%
Sales Price $ 8,500
Lets
Lets journalize
journalize this
this
transaction
transaction
Example: Factoring 34
Accounts Receivable
Cash 8,075
Receivable from Factor 425
Allowance for Bad Debts 300
Loss from Factoring Receivables 1,200
Accounts Receivable 10,000
Computations
Cash: $8,500 425 = $8,075
Factor Receivable: $8,500 x 5% = $425
Factoring Loss: ($10,000 300) $8,500 =
$1,200
35
Secured Borrowing
Assignment of Accounts Receivable
There are no special accounting problems
involved.
Simply record the loan.
Specific Assignment:
Specified accounts receivable pledged.
Accounts receivable reclassified on balance
sheet.
Footnote disclosure of loan provisions required.
36
Notes Receivable
A
Apromissory
promissory note
note isis an
an
unconditional
unconditional written
written
promise
promise to
to pay
pay aa certain
certain
sum
sum of
of money
money at at aa
specified
specified time.
time.
37
Notes Receivable
Assume:
Note Receivable $1,000
Interest Rate 10%
Time to Maturity 2 years
Journalize this note as:
1. An interest-bearing note.
2. A noninterest-bearing note.
39
Noninterest-Bearing Note:
Notes Receivable 1,210
Sales 1,000
Discount on Notes Receivable 210
(PV of $1,000 @ 10% for
2 years = $1,210)
40
Computing Interest
Face Annual
value interest time interest
of note rate
42
Disposing of N/R
Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4-
month, 9% interest note. On October 1, the maturity date, the
entry by Wolder to record the collection is:
Oct. 1. Cash 10,300
Notes Receivable 10,000
Interest Revenue 300
Dishonor of N/R
The End