Freight Collect – freight charge already paid

CHAPTER 10: by the buyer

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