Receivables

1
Classification of Receivables
 Accounts Receivable—used for selling
merchandise or services on credit, and normally
expected to be collected in a relatively short
period.
 Notes Receivable—used to grant credit on the
basis of a formal instrument of credit, called a
promissory note.
 Other Receivables—include interest receivable,
taxes receivable, and receivables from officers
and employees.

2
 Uncollectible
Uncollectible Receivables
Receivables

When
When Companies
Companies need need cash,
cash, they
they sell
sell their
their
receivables
receivables to to other
other companies.
companies. This This
transaction
transaction isis called
called factoring
factoring the
the receivables,
receivables,
and
and the
the buyer
buyer of of the
the receivables
receivables isis called
called aa
factor.
factor.

3
 Uncollectible
Uncollectible Receivables
Receivables
The
TheAllowance
Allowance Method
Method
 This method is consistent with the matching principle.
 Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
 Bad debt Expense is debited and Allowance for bad
debt is credited.
 When any customer does not pay due amount then
entry will be Allowance for bad debt debited and
credited to Accounts Receivable.

4
 The
The Allowance
Allowance Method
Method
On
On December
December 31,
31,Amir
Amir estimates
estimates that
that aa total
total of
of
Rs.4,000
Rs.4,000 of
of the
the Rs.105,000
Rs.105,000 balance
balance inin his
his
company’s
company’s Accounts
Accounts Receivable
Receivable will
will eventually
eventually
be
be uncollectible.
uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 4 000 00
Allowance for Doubtful Accounts 4 000 00

5
 The
The Allowance
Allowance Method
Method

Jan. 21 Allowance for Doubtful Accounts 610 00

Accounts Receivable—John Parker 610 00
To write off the uncollectible
account.

On
On January
January 21,
21, John
John
Parker’s
Parker’s account
account totaling
totaling
Rs.610
Rs.610 isis considered
considered toto be
be
uncollectible.
uncollectible.
6
 The
The Allowance
Allowance Method
Method

Jun. 10 Accounts Receivable—John Parker 610 00

Allowance for Doubtful Accounts 610 00
To reinstate the account
written off on Jan. 21.

An
Onentry
On
An Juneis
June
entry 10,
is
10,made
the
made to
to reinstate
the written-off
reinstate
written-off
John
John Parker’s
account
Parker’s
account account.
isis collected.
account.
collected.

7
 The
The Allowance
Allowance Method
Method

Jun. 10 Cash 610 00

Accounts Receivable—John Parker 610 00
To record collection on
account.

AAsecond
second entry
entry isis made
made to
to
record
record receipt
receipt of
of the
the cash.
cash.

8
 The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
UncollectibleAccounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are Rs.300,000
and it is estimated that 1% will be
uncollectible, the Uncollectible Accounts
Expense is Rs.3,000.
9
 The
The Allowance
Allowance Method
Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 3 000 00
Allowance for Doubtful Accounts 3 000 00

Based
Based on
on aa Percentage
Percentage of
of Sales
Sales

10
 The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
UncollectibleAccounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
2. Estimate based on analysis of receivables.
If it is estimated that Rs.3,390 of the receivables
will be uncollectible and the Allowance for
Uncollectible Accounts currently has a balance of
Rs.510, the Uncollectible Accounts Expense must
be debited for Rs.2,880 (Rs.3,390 – Rs.510).
11
 The
The Allowance
Allowance Method
Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00

Based
Based on
on an
anAnalysis
Analysis of
of Receivables
Receivables

12
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300

Total
Total accounts
accounts receivable
receivable
shown
shown by
by age.
age.

13
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co. 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

Uncollectible percentages based on

experience and industry averages.
14
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
A Co. Rs. 150 Rs. 150
B Co. 610 Rs. 350 Rs.260
C Co. 470 Rs. 470

Nasir 160 160

Total Rs.86,300 Rs.75,000Rs.4,000Rs.3,100Rs.1,900Rs.1,200Rs.800
Rs.300
Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

AMOUNT Rs.3,390 =Rs.1,500 Rs.200 Rs.310 Rs.380 Rs.360 Rs.400 Rs.240

15
 Year-End
Year-EndAdjustment
Adjustment for
for Uncollectibles
Uncollectibles
General Ledger Balance Sheet
Accounts Receivable
Accounts receivable
A 86,300 Rs.86,300
Less allowance for C
Allowance for Doubtful Accts. doubtful accounts 3,390
510 A Net realizable value
2,880 B Rs.82,910
A Balances before adjustment
3,390 C

B Year-end adjustment:
Uncollectible Accts. Expense
B 2,880 Rs.3,390 – Rs.510 = Rs.2,880

C Balance after adjustment

16
Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
 Accounts that prove to be uncollectible are written
off in the year they become worthless.
 Uncollectible Accounts Expense is debited and
Accounts Receivable is credited for each such
transaction.

17
 The
The Direct
Direct Write-Off
Write-Off Method
Method
May 10 Uncollectible Accounts Expense 420 00
Accounts Receivable—Abid 420 00
To write off an uncollectible
account.

On
On May
May 10,
10,Abid
Abid account
account was
was
decided
decided to
to write
write off
off by
by Rs.420.
Rs.420.

18
 The
The Direct
Direct Write-Off
Write-Off Method
Method
Nov. 1 Accounts Receivable—Abid 420 00
Uncollectible Accounts Expense 420 00
To reinstate account written
off on May 10.

1st Entry

In
In November,
November,Abid
Abid remits
remits aa check
check for
for
Rs.420
Rs.420 in
in payment
payment ofof his
his account.
account.
19
 The
The Direct
Direct Write-Off
Write-Off Method
Method

Nov. 1 Cash 420 00

Accounts Receivable—Abid 420 00
To record collection on
account.

2nd Entry
A
Asecond
second entry
entry isis needed
needed to
to record
record
receipt
receipt of
of the
the cash.
cash.
20
 Notes
Notes Receivable
Receivable

Payee
Payee
2,500.00
Rs.____________
_ Fresno, California______________20___
March 16 10
Ninety days
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Engro Company
THE ORDER OF ____________________________________________
Two thousand five hundred 00/100---------------------------
_________________________________________________Rupees
National Bank
PAYABLE AT ______________________________________________
VALUE RECEIVED WITH INTEREST AT ____10% Maker
Maker
14
NO. _______ June 14, 2010
DUE___________________

H. B. Lane
TREASURER, HABIB COMPANY

21
 Notes
Notes Receivable
Receivable
A promissory note is a written
document containing a promise to pay:

 aa specific
specific amount
amount ofof money
money (principal)
(principal)

 to
to aa specific
specific person
person or
or company
company (payee)
(payee)

 at
at aa specific
specific place
place

 on
on aa specific
specific date
date or
or upon
upon demand
demand

 plus
plus interest
interest at
at aa specific
specific percentage
percentage of
of
the
the principal
principal (face)
(face) amount
amount perper year
year
22
 Notes
Notes Receivable
Receivable

Received
Received aa Rs.6,000,
Rs.6,000, 12%,
12%, 30-day
30-day note
note
dated
dated November
November 21,21, 2010
2010 in
in settlement
settlement
of
of the
the account
account of
of A
A Co.
Co.

23
 Notes
Notes Receivable
Receivable

Interest Calculation
Principal x Rate x Time = Interest
Rs.6,000 x 12% x 30/360 = Rs.60.00

Maturity Value Calculation

Principal + Interest = Maturity Value
Rs.6,000 + Rs.60.00 = Rs.6,060.00

24
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12% note
dated November 21, 2006.

A
ARs.6,000
Rs.6,000 30-day,
30-day, 12% 12% note
note dated
dated
November
November 21 21 isis received
received from
fromAACO.
CO.
Company
Company inin exchange
exchange for for merchandise.
merchandise.
25
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
Received principal and interest
on matured note.

On
On December
December 21, 21, when
when the
the note
note matures,
matures,
the
the firm
firm receives
receives Rs.6060
Rs.6060 from
fromA ACo.
Co.
Company
Company (Rs.6,000
(Rs.6,000 plus
plus Rs.60
Rs.60 interest).
interest).
26
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Accounts Receivable—A Co. 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
To record dishonored note and
interest.

IfIfA
ACo.
Co. Company
Company fails fails to
to pay
pay the
the note
note on
on the
the
due
due date,
date, itit isis considered
considered aa dishonored
dishonored note
note
receivable
receivable.. TheThe note note and
and interest
interest are
are transferred
transferred
to
to the
the customer’s
customer’s account.
account. 27
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 1 Notes Receivable 4 000 00
Accounts Receivable—A Co. 4 000 00

Received note in settlement of

account.

A
A90-day,
90-day, 12%
12% note
note dated
dated December
December 1, 1, 2010,
2010,
isis received
received from
from Ford
Ford Company
Company to to settle
settle its
its
account,
account, which
which has
has aa balance
balance of
of Rs.4,000.
Rs.4,000.
28
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Adjusting entry for accrued
interest.

Assuming
Assuming thatthat the
the accounting
accounting period
period
ends
ends on on December
December 31, 31, an
an adjusting
adjusting entry
entry
isis required
required to
to record
record the
the accrued
accrued interest
interest
of
of Rs.40
Rs.40 (Rs.4,000
(Rs.4,000 xx 0.12
0.12 xx 30/360).
30/360).
29
 Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Mar. 1 Cash 4 120 00
Notes Receivable 4 000 00
Interest Receivable 40 00
Interest Revenue 80 00
Received payment on note and
interest.

On
On March
March 1,1, 2004,
2004, Rs.4,120
Rs.4,120 isis received
received for
for
the
the note
note (Rs.4,000)
(Rs.4,000) and
and interest
interest (Rs.120).
(Rs.120).
30