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Seven: Accounting For Receivables
Seven: Accounting For Receivables
Seven: Accounting For Receivables
Seven
Accounting
for
Receivables
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Accounts Receivable and Notes
Receivable
When a company allows customers to “buy now and pay
later,” the company’s right to collect cash in the future is
called accounts receivable. Individually, these
receivables are typically small and are payable within 30
days.
When a longer credit term is needed, or when the
receivable is large, the company usually requires the
customer to issue a note that specifies interest and
other credit terms. The company then records a note
receivable.
7-1
Credit Terms and Bad Debts
Some customers may be unwilling or unable to pay
their accounts receivable. Because we do not want to
overstate assets, we must show accounts receivable at
its net realizable value on the balance sheet. The net
realizable value is the gross amount of the receivables
less some estimated allowance for doubtful accounts.
Multiplying the service revenue by
the percentage estimate of
uncollectible accounts is commonly
called the percent of revenue
method of estimating uncollectible
accounts expense.
7-2
Recognizing Uncollectible
Accounts Expense
Recognizing Uncollectible Accounts Expense
Based upon past experience, assume that a
company estimates that $75 of its current
accounts receivable balance will eventually
prove to be uncollectible.
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
7-3
Financial Statements
7-4
Aging Schedule
7-5
Balance Required under the
Percent of Receivables Method
7-6
Computing Uncollectible
Accounts Expense
Required Allowance Balance $ 3,760
Less: Unadjusted Allowance Bal. (500)
Uncollectible Accounts Expense $ 3,260
7-7
Direct Write-Off Method
Recall that in 2013, ATC recognized $14,000 of
revenue on account.
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
Accts. Rec.
14,000 = NA + 14,000 14,000 – NA = 14,000 NA
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
Accts. Rec.
(70) = NA + (70) NA – 70 = (70) NA
7-9
Direct Write-Off Method – Recovery of
a Written-Off Account
Also in 2014, ATC collects $10 from an account
that had been previously written off. ATC first
reinstates the account by reversing the write-off.
7-10
Direct Write-Off Method – Recovery of
a Written-Off Account
7-11
Accounting for a
Promissory Note
7-12
Notes Receivable
Event 1 Loan of Money
On November 1, 2013, ATS loans $15,000 cash to
Stanford Cummings. Cummings issues ATS a note
promising to repay the loan, with interest, in one
year.
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
1 Cash + Notes Rec.
(15,000) 15,000 = NA + NA NA – NA = NA (15,000) IA
7-13
Interest Revenue
Event 2 Recognition of Interest Revenue
At the end of 2013, ATS must accrue interest on its
note receivable.
$15,000 × 6% × 2/12 = $150 interest revenue
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
2 150 = NA + 150 150 – NA = 150 NA
7-14
Collection of a Note Receivable
Event 3 Collection of Principal and Interest
On October 31, 2014, ATS collects the principal and
interest due on the note receivable. ATS first
recognizes interest revenue for the 10 months of
2014.
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
3a 750 = NA + 750 750 – NA = 750 NA
7-15
Collection of a Note Receivable
Event 3 Collection of Principal and Interest
Now that the entire $900 of interest receivable has
been accrued, ATS records the collection of $15,900
in principal and interest on the note.
Account Title Debit Credit
Cash 15,900
Notes receivable 15,000
Interest receivable 900
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
3b NA = NA + NA NA – NA = NA 15,000 IA
900 OA
7-16
Credit Card Sales
Rather than maintaining a credit-granting
department, many companies find it cost
beneficial to accept credit cards. The credit card
company deducts a fee, usually between 2% and
8%, from the gross amount of the sales, and
pays the merchant the net balance (gross sales
less credit card fee).
7-17
Credit Card Sales
7-18
Credit Card Sales
Event 2 Collection of a Credit Card Receivable
ATS collects the full amount due from the
credit card company.
Event No. Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
2 Cash + Acct. Rec.
950 (950) = NA + NA NA – NA = NA 950 OA
7-19
Accounts Receivable Turnover
7-20
Days to Collect Receivable
Average Number of
365
Days to Collect = Accounts Receivable Turnover Ratio
Accounts Receivable
7-21
End of Chapter Seven
7-22