ADMS2500 – WEEK #5 SUMMARY (PART B)

Topic: Receivables
Learning outcomes: Understand the difference between cash sales and credit sales, the
difference between accounts receivable (A/R), notes receivable (N/R), and other receivables, and
the difference between the direct-write off method and the allowance method. Understand how
to decide the net-realizable value (NRV) of A/R at the end of each period. Be able to
appropriately apply the allowance method in different context. Know how to calculate bad debt
and account for bad debt using aging method vs. % of sales method. Be able to correctly record
the write-off of bad debts and the recoveries of bad debts. Be able to calculate interest on notes
receivable and record of notes receivable and interests. Also understand ways to assign
receivables, ways to dispose receivables, receivables used as a pledge, and how and where to
present receivables on financial statements.

Receivables: claims that are expected to be collected in cash.

Accounts Receivable (A/R): the proceeds which the company will receive from its customers
who have purchased its goods & services on credit. Also called sales on account or sales on
credit. It usually involves oral promise and has no interest.
Notes Receivable (N/R): a written promise to receive money at a future date. The money is
usually made up of interest and principal.
Installment Receivables: a contract that allows buyers to pay by installments, which usually
involves a series of payments of fixed amount over a certain period time. The installment
consists payment of principle and interest charge.
NRV: net realizable value of accounts receivable, equal to the balance of accounts receivable
minus the balance of the allowance for doubtful or uncollectible accounts.
“Near Cash” Assets: assets that can be easily converted into cash
Temporary investments: investments that are intended to be held for a short-term. They are
easier to be converted into cash as compared to long-term investments.
Liquidity: the ability of firm to covert current assets into cash. The higher the liquidity, the
easier of such conversion.
Direct write-off method: The less preferable method for recognizing losses from uncollectible
accounts. The bad debt expense is recognized when the bad debt actually occurs.
Allowance method: the preferable method for recognizing losses from uncollectible accounts.
The bad debt expense is recognized when the bad debt is anticipated to occur.
Aging method: One of the two ways to estimate bad debt when the allowance method is used.
The bad debt expenses are decided based on the age of outstanding account receivables.
% of sales method: One of the two ways to estimate bad debt when the allowance method is
used. The bad debt expenses are decided based on the percentage of credit sales.

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 ADMS2500 – WEEK #5 SUMMARY (PART B)

Step 1: Browse the textbook chapter on Receivables. Listen to the pre-recorded class lecture
while reviewing the posted lecture slides. The recorded lecture has 3 parts, part 1 covers
fundamental concepts related to receivables, part 2 focus on how to account for bad debt, and
part 3 focus on how to account for notes receivable, as well as how to calculate interest. Pay
special attention to part 2 to understand the allowance method, as this is the most difficult topic
of this chapter.

Step 2: Attempt the following questions in eBook End of Chapter 7 (activities recommended):
Problem 01, Problem 02, Problem 03 and Problem 05.

Step 3: Remember to do Connect assignments. Multiple attempts allowed, best mark counts.

Know how to apply the allowance method – see illustration below and the associated
explanations in YouTube video.

ADMS2500 – WEEK #5 SUMMARY (PART B)

Copyright © 2023 – York University. No part of this publication may be reproduced or transmitted in any form.
 ADMS2500 – WEEK #5 SUMMARY (PART B)

Important technique: Difference between Direct Write-off Method and Allowance Method
Direct Write-off Method Allowance Method
In the Balance Sheet shows: In the Balance Sheet shows:
Accounts Receivables 1,000,000 Accounts Receivables 1,000,000
- Uncollectible accounts (300,000)
Net Realizable value of A/R 700,000
In the Income Statement shows: In the Income Statement shows:
Sales 1,000,000 Sales 1,000,000
CGS (600,000) CGS (600,000)
Gross Profit 400,000 Gross Profit 400,000
- Operating Expenses (30,000) - Operating Expenses (30,000)
- Bad Debt Expense (300,000)
Net Income (loss) 370,000 Net Income (loss) 70,000
Same company, same operations but Net Income in one period is very different depending on
the method used to account for uncollectible amounts in A/R
Adjusting Journal Entry at the end of every period
No AJE because all customers are Estimated that some customers will not pay (use % of
still promising to pay (rationale: too Sales or Aging of Accounts to determine the amount):
early to determine who will not pay) Dr Bad Debt Expense
Cr Allowance for Uncollectible Accounts
Journal entry to reflect when a customer says they will not pay:
Dr Bad Debt Expense Dr Allowance for Uncollectible Accounts
Cr Accounts Receivable Cr Accounts Receivable

Recording notes receivable and interest: determine who is owed (seller) and who owes
(Customer). We illustrate with this example from the eBook: Ace Company sold $4,000 worth of
merchandise to Birch Company. On October 1, after the regular credit period had elapsed, Birch
Company gave Ace Company a 60-day, 12% note for $4,000 (this is a Notes Payable for Birch).
Ace Company (received the Note) Birch Company (gave the Note)
The first journal entry to record receiving the The first journal entry to record issuing the
Note Payable: Note Payable:
Dr Notes Receivable 4,000 Dr Accounts Payable 4,000
Cr Accounts Receivable 4,000 Cr Notes Payable 4,000
The second journal entry to record the The second journal entry to record the
collection of the note on November 30 at payment of the note on November 30 at
maturity date maturity date
Dr Cash 4,080 Dr Notes Payable 4,000
Cr Interest Income 80 Dr Interest Expense 80
Cr Notes Receivable 4,000 Cr Cash 4,080
Same economic event recorded differently based on the role played by the company.
Interest is calculated as $4,000 x 12% x 2 / 12 (Note that the interest rate for 2 months or 60
days is 12% divided by 12 months and multiplied by 2: 12 / 12 x 2 = 2%)

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