ACCOUNTS RECEIVABLE Freight Prepaid – freight charge already paid Receivables – financial assets that represent a by the seller contractual right to receive cash/financial asset from another entity. Trade Receivables – arising from services in the ordinary course of the business; TERMS RELATED TO SALES Expected to be realized w/in the normal DISCOUNT operating cycle or 1 year, whichever is longer, classified as current assets Cash Discount – reduction from an invoice price by reason of prompt payment Accounts Receivable – open accounts, not supported by notes; Sales Discount – part of the buyer o Initially at face/original invoice Purchase Discount – part of the seller amount o Subsequently at net realizable value/amortized cost METHODS OF RECORDING CREDIT SALES Notes Receivable – supported by formal promise to pay in the form of notes 1. Gross Method – account receivables and sale are recorded at gross amount of the Nontrade Receivables – claims arising source invoice other than sale of merchandise or services 2. Net Method - account receivables and sale are recorded at net amount of the invoice (invoice price - cash discount) ESTIMATING THE NET REALIZABLE VALUE Deduct… ACCOUNTING FOR BAD DEBTS 1. Allowance for freight charge 1. Allowance Method – recognition of a bad 2. Allowance for sales return debt loss if the accounts are doubtful in 3. Allowance for sales discount collection 4. Allowance for doubtful accounts 2. Direct Write-off Method – recognition of bad debt loss only when accounts are proved to be worthless or uncollectible TERMS RELATED TO FREIGHT CHARGE DOUBTFUL ACCOUNTS IN THE INCOME FOB Destination STATEMENT Ownership of goods vested in the buyer 1. Distribution Cost – collection of accounts upon receipt under the charge of the sales manager Seller responsible for freight charge up to point of destination 2. Administrative Cost – collection of accounts under the charge of an officer other FOB Shipping Point than the sales manager Ownership of goods vested in the buyer upon shipment Buyer responsible for freight charge up METHODS FOR ESTIMATING to point of destination DOUBTFUL ACCOUNTS STATEMENT OF FINANCIAL POSITION APPROACH Violates matching principle 1. Aging the accounts receivable
More accurate and scientific computation
of allowance for DA and A/R Accounts are classified into not due/past due Time consuming 2. Percent of accounts receivable
Present A/R at estimated net realizable
value May not be reliable
INCOME STATEMENT APPROACH
3. Percent of sales
Eliminate extra work of making a record
of cash sales and credit sales, but unsatisfactory when there is fluctuation of the two Proper matching of cost against revenue May not show estimated realizable value Resulting amount is ALREADY the amount of DA expense
IMPAIRMENT – accounts receivable
considered uncollectible with objective evidence, and can be measured reliably 1. Individually significant A/R – impaired separately 2. Not individually significant A/R – collectively assessed 3. A/R not considered impaired – included w/ other A/R and collectively assessed