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Chapter 9

ACCOUNTING FOR RECEIVABLES

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved

CHAPTER 8 REVIEW

Define cash and cash equivalents and explain how to

𝟏 report them.
• Cash includes currency, coins, and amounts on (or acceptable
for) deposit in checking and savings accounts.
• Cash equivalents are short-term, highly liquid investment assets
readily convertible to a known cash amount and sufficiently close
to their maturity date so that market value is not sensitive to
interest rate changes.
• Cash and cash equivalents are liquid assets because they are
readily converted into other assets or can be used to pay for
goods, services, or liabilities.
McGraw-Hill/Irwin Slide 2

CHAPTER 8 REVIEW

THE GOALS OF CASH MANAGEMENT

1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.

CONTROL OF CASH DISBURSEMENT

• Control of cash disbursements is especially important as
most large thefts occur from payment of fictitious invoices.
• Keys to controlling cash disbursements:
1. To require all expenditures to be made by check.
2. To deny access to the accounting records to anyone
other than the owner who has the authority to sign
checks..
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CASH MANAGEMENT PRINCIPLES

Encourage collection of receivables.

Delay payment of liabilities.

Keep only necessary levels of assets.

Plan expenditures.

Invest excess cash.

McGraw-Hill/Irwin Slide 4

Adjusting Entries from a Bank Reconciliation

McGraw-Hill/Irwin Slide 5

CHAPTER 9:
ACCOUNTING FOR RECEIVABLES

Accounting receivable

CONTENT Notes receivable

Disposing of receivable

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MAIN CONTENT

McGraw-Hill/Irwin Slide 7

1. ACCOUNTING RECEIVABLE

ACCOUNTS RECEIVABLE
KHÁI NIỆM VỀ CÁC KHOẢN PHẢI THU

 Amounts due from customers

for credit sales.
 Credit sales require:

 Maintaining a separate
account receivable for each
customer.
 Accounting for bad debts that
result from credit sales.

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RECOGNIZING ACCOUNTS RECEIVABLE

GHI NHẬN CÁC KHOẢN PHẢI THU

Sales on Credit
Credit sales are recorded by increasing (debiting) Accounts
Receivable. A company must also maintain a separate account for
each customer that tracks how much that customer purchases, has
already paid, and still owes.
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VALUING ACCOUNTS RECEIVABLE

ĐỊNH GIÁ KHOẢN PHẢI THU

Some customers may not pay their account.

Uncollectible amounts are referred to as bad
debts.

There are two methods of accounting for bad debts:

 Direct Write-Off Method – Xóa nợ trực tiếp
 Allowance Method – Trích lập dự phòng

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DIRECT WRITE-OFF METHOD

PHƯƠNG PHÁP XÓA NỢ TRỰC TIẾP

On November 1st, 2008, Techcom had sales on credit of 520

for a customer named J. Kent, the due date is 23rd ,
January, 2009.
DR CR
Nov 1, 08 Account receivable - J.Kent 520
Sales 520
Recording the credit sales

On January 23rd,2009, J. Kent cannot pay the $520 owed to

TechCom.
DR CR
Jan 23, 09 Bad Debts Expense 520
Accounts Receivable - J. Kent 520
To write-off uncollectible account
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DIRECT WRITE-OFF METHOD

PHƯƠNG PHÁP XÓA NỢ TRỰC TIẾP

Recovering a Bad Debt:

On March 11th,2009, J. Kent was able to make full
payment to TechCom for the amount previously written-
off.
DR CR
Mar 11 Accounts Receivable - J. Kent 520
Bad Debts Expense 520
To reinstate account previously written-off

Mar 11 Cash 520

Accounts Receivable - J. Kent 520
To record payment on account
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ALLOWANCE METHOD
PHƯƠNG PHÁP TRÍCH LẬP DỰ PHÒNG

At the end of each period, estimate total bad debts

expected to be realized from that period’s sales.
There are two advantages to the allowance method:
1. It records estimated bad debts expense in the
period when the related sales are recorded.
2. It reports accounts receivable on the balance
sheet at the estimated amount of cash to be
collected.

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THE BASIS OF ALLOWANCE METHOD

PHƯƠNG PHÁP TRÍCH LẬP DỰ PHÒNG

Companies must weigh at least two accounting concepts

when considering the use of the direct write-off method:

Matching principle
• requires expenses to be reported in the same
accounting period as the sales they help produce.

Materiality constraint
• states that an amount can be ignored if its effect on
the financial statements is unimportant to users’
business decisions.

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RECORDING BAD DEBTS EXPENSE

GIAI ĐOẠN TRÍCH LẬP DỰ PHÒNG, PHẢI GHI NHẬN CHI PHÍ

On November 1st, 2008, Techcom had sales on credit of

520 for a customer named J. Kent, the due date is 23rd ,
January, 2009.

At the end of the year, TechCom estimates that $320 of its

accounts receivable will prove uncollectible.
DR CR
Dec. 31 Bad Debts Expense 320
Allowance for Doubtful Accounts 320
To record estimated bad debts
Contra-asset account
Accounts Receivable Allowance for Doubtful Accounts
Bal. 20,000 Dec. 31 1,500

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WRITING OFF OF THE BAD DEBT

GIAI ĐOẠN SỬ DỤNG DỰ PHÒNG

On the due date, 23rd , January, 2009, the customer paid

only $ 200 for Tech com. The company must use allowance
account to finish account receivable.

DR CR
Jan, 23rd, 2009 Cash 200
Account receivable 200

DR CR
Jan, 23rd, 2009 Allowance for Doubtful Accounts 320
Account receivable 320

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ESTIMATING BAD DEBTS

CÁC PHƯƠNG PHÁP DỰ BÁO SỐ NỢ XẤU

Two Methods
1. Percent of Credit Sales Method
Theo phần trăm doanh số bán chịu
2. Accounts Receivable Methods
Theo khoản phải thu khách hàng
 Percent of Accounts Receivable – Căn cứ theo
số dư tài khoản A.R tại thời điểm trích lập
 Aging of Accounts Receivable – Căn cứ theo
thời gian quá hạn của món nợ (Theo tuổi của
các khoản phải thu)

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PERCENT OF CREDIT SALES

Bad debts expense is computed as follows:

Current Period Sales
× Bad Debt %
= Estimated Bad Debts Expense

Musicland has credit sales of $400,000 in 2009. It is

estimated that 0.6% of credit sales will eventually
prove uncollectible.
Let’s look at recording Bad Debts Expense for 2009.
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1. PERCENT OF CREDIT SALES METHOD

THEO PHẦN TRĂM DOANH SỐ BÁN CHỊU

$ 400,000 Musicland’s accountant

× 0.6% computes estimated
Bad Debts Expense of
= $ 2,400
$2,400.

DR CR
Dec. 31 Bad Debts Expense 2,400
Allowance for Doubtful Accounts 2,400
To record estimated bad debts

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PERCENT OF ACCOUNTS RECEIVABLE

Purpose: the goal of bad debts adjusting entry for

these methods is to make the Allowance for
Doubtful Accounts balance equal to the portion of
AR that is estimated to be uncollectible.

Two ways:
1. Computing the percent uncollectible from
the total AR.

2. Aging accounts receivables

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2. PERCENT OF ACCOUNTS RECEIVABLE

1. Compute the estimate of the Allowance

for Doubtful Accounts.
Year-end Accounts Receivable × Bad Debt %

Bad Debts Expense is computed as:

Total Estimated Bad Debts

Previous Balance in Allowance Account
= Current Bad Debts Expense

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2. PERCENT OF ACCOUNTS RECEIVABLE

THEO PHẦN TRĂM SỐ DƯ A.R TẠI THỜI ĐIỂM TRÍCH LẬP

Musicland has $50,000 in

accounts receivable and a $200
credit balance in Allowance for
Doubtful Accounts on December
31, 2009. Past experience
suggests that 5% of receivables
are uncollectible.
Let’s record Musicland’s Bad
Debts Expense for 2009.

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2. PERCENT OF ACCOUNTS RECEIVABLE

THEO PHẦN TRĂM SỐ DƯ A.R TẠI THỜI ĐIỂM TRÍCH LẬP

Desired balance in Allowance for

Doubtful Accounts. Allow ance for
$ 50,000 Doubtful Accounts
200
× 5.00% 2,300
= $ 2,500 2,500

DR CR
Dec. 31 Bad Debts Expense 2,300
Allowance for Doubtful Accounts 2,300
To record estimated bad debts

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AGING OF ACCOUNTS RECEIVABLE METHOD

THEO THỜI GIAN QUÁ HẠN CỦA MÓN NỢ (theo tuổi A.R)

1. Each receivable is grouped by

how long it is past its due date.

2. Each age group is multiplied

by its estimated bad debts
percentage.

3. Estimated bad debts for each

group are totaled.

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AGING OF ACCOUNTS RECEIVABLE METHOD

THEO THỜI GIAN QUÁ HẠN CỦA MÓN NỢ (theo tuổi A.R)

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AGING OF ACCOUNTS RECEIVABLE METHOD

THEO THỜI GIAN QUÁ HẠN CỦA MÓN NỢ (theo tuổi A.R)

Allowance for Doubtful

Musicland has an unadjusted Accounts
200
credit balance in the allowance
2,070
account is $200. 2,270

We estimated the proper

balance to be $2,270.

DR CR
Dec. 31 Bad Debts Expense 2,070
Allowance for Doubtful Accounts 2,070
To record estimated bad debts

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SUMMARY OF METHODS

Aging of
% of Sales % of Receivables
Receivables

Emphasis on Emphasis on Emphasis on

Matching Realizable Value Realizable Value

Sales Accts. Accts.

Bad Rec. All. for Rec. All. for
Debts Doubtful Doubtful
Exp. Accts. Accts.

Income
Balance
Statement
Sheet Focus
Focus
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2. NOTES RECEIVABLE

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NOTES RECEIVABLE
NOTE RECEIVABLE: A promissory note is a written promise
to pay a specified amount of money, usually with interest, either
on demand or at a definite future date

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INTEREST COMPUTATION

Principal Annual Time

of the × interest × expressed = Interest
note rate in years

Even for If the note is

maturities less expressed in
than one year, days, base a
the rate is year on 360
annualized. days.
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COMPUTING MATURITY AND INTEREST

On July 10, 2009, TechCom received a $1,000, 90-day, 12%

promissory note as a result of a sale to Julia Browne.
What is the maturity date of the note?

Days in July 31
Minus the date of the note 10
Days remaining in July 21
Days in August 31
Days in September 30
Days in October to maturity 8
Period of the note in days 90

The note is due and payable on October 8, 2009.

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COMPUTING MATURITY AND INTEREST

On July 10, 2009, TechCom received a $1,000, 90-day, 12%

promissory note as a result of a sale to Julia Browne.
What is the maturity date of the note?

The note is due and payable on October 8, 2009.

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COMPUTING MATURITY AND INTEREST

Principal Annual Time

of the × interest × expressed = Interest
note rate in years

$ 1,000 × 12% × 90/360 = $ 30

Total interest is due on

October 8, 2009.

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RECOGNIZING NOTES RECEIVABLE

Here is the entry to record the note on July 10, 2009.

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RECOGNIZING NOTES RECEIVABLE

Assume that TechCom agreed to accept $232 in cash along
with a $600, 60-day, 15% note from Jo Cook to settle her
$832 past-due account.
TechCom made the following entry to record receipt of this
cash and note

Principal Annual Time

of the × interest × expressed = Interest
note rate in years
$ 600 × 15% × 60/360 = $ 15
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Valuing and Settling Notes

1. HONORING NOTES RECEIVABLE
Recording an Honored Note The principal and interest of a note are due on its maturity
date. The maker of the note usually honors the note and pays it in full

When J. Cook pays the note above on its due date,

TechCom records it as follows.

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Valuing and Settling Notes

2. RECORDING A DISHONORED NOTE
• When a note’s maker is unable or
refuses to pay at maturity, the note
is dishonored. The act of
dishonoring a note does not relieve
the maker of the obligation to pay.
• The payee should use every
legitimate means to collect.
• How do companies report this
event?

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Valuing and Settling Notes

2. RECORDING A DISHONORED NOTE
TechCom holds an $800, 12%, 60-day note of Greg Hart.
At maturity, October 14th, Hart dishonors the note.

$800 ×12% × 60/360 = $16 interest

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RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
On December 16th, TechCom accepts a $3,000, 60-
day, 12% note from a customer in granting an
extension on a past-due account. When TechCom’s
accounting period ends on December 31, $15 of
interest has accrued on the note.

$3,000 × 12% × 15/360 = $15 accrued interest

DR CR
Dec. 31 Interest Receivable 15
Interest Revenue 15
To accrue interest on note

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RECORDING END-OF-PERIOD
INTEREST ADJUSTMENTS
Recording collection on note at maturity.
Days in December 31
Minus the date of the note 16
Day remaining in December 15
Days in January 31
Days in February 14
Period of the note in days 60

DR CR
Feb 14 Cash 3,060
Interest Receivable 15
Interest Revenue 45
Notes Receivable 3,000
To record full payment of note
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3. DISPOSING OF RECEIVABLE

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DISPOSING OF RECEIVABLES

 Companies sometimes want to

convert receivables to cash before
they are due.
 They can sell or factor receivables.
 They may pledge receivables as
security for a loan.

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DISPOSING OF RECEIVABLES

Selling Receivables
• Company can sell all or a portion of its receivables to a finance company or
bank.
• The buyer, called a factor, charges the seller a factoring fee and then the
buyer takes ownership of the receivables and receives cash when they come
due.

If TechCom sells $20,000 of its accounts receivable and is charged a 4%

factoring fee, it records this sale as follows

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DISPOSING OF RECEIVABLES

Pledging Receivables
• A company can raise cash by borrowing money and pledging its receivables
as security for the loan.
• Pledging receivables does not transfer the risk of bad debts to the lender
because the borrower retains ownership of the receivables.
• If the borrower defaults on the loan, the lender has a right to be paid from
the cash receipts of the receivable when collected

When TechCom borrows $35,000 and pledges its receivables as security, it

records this transaction as follows

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CHAP 9 - PRACTICE

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END OF CHAPTER 9

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