Accounts Receivableused for selling merchandise or services on credit, and normally expected to be c

1
Classification of Receivables

• Accounts Receivableused for selling merchandise
  or services on credit, and normally expected to
  be collected in a relatively short period.
• Notes Receivableused to grant credit on the
  basis of a formal instrument of credit, called a
  promissory note.
• Other Receivablesinclude interest receivable,
  taxes receivable, and receivables from officers
  and employees.

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Separating the Receivable Functions
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Uncollectible Receivables

• (Credit sales that cannot be collected)
• How does a business limit these?
• Cash sales only
• Credit granting functions
• Credit limits
• Aggressive collection
• Shifting risk to other companies
• Credit cards
• Factoring

4
Accounting for Uncollectible Receivables

• Direct Write-Off method write-off receivables
  only when they become worthless
• Allowance Method establish a reserve to cover
  estimated receivables that will become worthless
  at some time in the future

5
Direct Write-Off Method

• When used?
• If a business sells mainly on a cash basis
• If it is difficult to estimate uncollectible
  receivables
• Advantage?
• Simplicity

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The Direct Write-Off Method
May 10 Uncollectible Accounts Expense 420
00
Accounts ReceivableD. L. Ross 420 00
To write off an uncollectible account.
On May 10, D. L. Ross account was determined to
be uncollectible. The 420 balance is written
off the books.
7
The Direct Write-Off Method
Nov. 1 Accounts ReceivableD. L. Ross
420 00
Uncollectible Accounts Expense 420 00
To reinstate account written off on May 10.
1st Entry
In November, D. L. Ross remits a check for 420
in payment of his account.
8
The Direct Write-Off Method
Nov. 1 Cash 420 00
Accounts ReceivableD. L. Ross 420 00
To record collection on account.
2nd Entry
A second entry is needed to record receipt of the
cash.
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Allowance Method

• When used?
• If uncollectible receivables can be estimated on
  some reasonable basis
• Advantage?
• Used by most businesses
• Matches uncollectible account expense with
  related sales (matching principle)
• Reduces the value of receivables to what a
  business really thinks will be collected (called
  Net Realizable Value)

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Estimating Uncollectibles

• Generally based on past experience and forecasts
• of the future
• Estimate based on Sales a of credit sales
• Estimate based on analysis of Receivables by
• using an aged Accounts Receivable report

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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 Ashby Co.
150 150 John Parker 610 350 260 Brock
Co. 470 470 Saxon Woods 160 160
Total 116,800 105,500 4,000 3,100 1,900 1,20
0 800 300
Uncollectibles
2 5 10 20 30 50 80
PERCENT
4,000 2,110 200 310 380 360 400 240
AMOUNT
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The Allowance Method
On December 31, Cynthia Richards estimates that a
total of 4,000 of the 105,000 balance in her
companys Accounts Receivable will eventually be
uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 4
000 00
Allowance for Doubtful Accounts 4 000 00
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The Allowance Method
Jan. 21 Allowance for Doubtful Accounts
610 00
Accounts ReceivableJohn Parker 610 00
To write off the uncollectible account.
On January 21, John Parkers account totaling
610 is considered to be uncollectible.
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The Allowance Method
Jun. 10 Accounts ReceivableJohn Parker
610 00
Allowance for Doubtful Accounts 610 00
To reinstate the account written off on Jan. 21.
An entry is made to reinstate John Parkers
account.
On June 10, the written-off account is collected.
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The Allowance Method
Jun. 10 Cash 610 00
Accounts ReceivableJohn Parker 610 00
To record collection on account.
A second entry is made to record receipt of the
cash.
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Notes Receivable
A promissory note is a written document
containing a promise to pay

• a specific amount of money (principal)
• to a specific person or company (payee)
• at a specific place
• on a specific date or upon demand
• plus interest at a specific percentage of the
  principal (face) amount per year

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Notes Receivable
Payee
2,500.00
_____________
Fresno, California______________20___
March 16 06
Ninety days
________________ _AFTER DATE _______ PROMISE TO
PAY TO
We
THE ORDER OF _____________________________________
_______
Judson Company
Two thousand five hundred 00/100------------------
---------
_________________________________________________
DOLLARS
Maker
City National Bank
PAYABLE AT _______________________________________
_______
VALUE RECEIVED WITH INTEREST AT ____
10
NO. _______ DUE___________________
14 June 14, 2006
H. B. Lane
TREASURER, WILLIARD COMPANY
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Advantages/Definitions

• Advantages over regular Accounts Receivable
• Written agreement to pay back debt interest
• Stronger legal claim in case on non-payment

• Definitions
• Maturity date (due date) either in days or
  months
• Maturity value amount due at maturity date
• (principal interest)
• Interest usually paid when principal is paid,
• unless note has a longer term

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Notes Receivable
Received a 6,000, 12, 30-day note dated
November 21, 2006 in settlement of the account of
W. A Bunn Co.
20
Notes Receivable
Interest Calculation
Principal x Rate x Time Interest 6,000 x 12 x
30/360 60.00
Maturity Value Calculation
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Accounting for Notes Receivable
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12 note dated November 21,
2006.
A 6,000 30-day, 12 note dated November 21 is
received from W. A Bunn Company in exchange for
merchandise.
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Accounting for Notes Receivable
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
Received principal and interest on matured note.
On December 21, when the note matures, the firm
receives 6060 from W. A. Bunn Company (6,000
plus 60 interest).
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Accounting for Notes Receivable
Dec. 21 Accounts ReceivableBunn Co. 6 060
00
Notes Receivable 6 000 00
Interest Revenue 60 00
To record dishonored note and interest.
If W. A. Bunn Company fails to pay the note on
the due date, it is considered a dishonored note
receivable. The note and interest are
transferred to the customers account.
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Crabtree Co. Balance SheetDecember 31, 2006

• Assets
• Current assets
• Cash 119,500
• Notes receivable 250,000
• Accounts receivable 445,000
• Less allowance for
• doubtful accounts 15,000 430,000
• Interest receivable 14,500
• Merchandise inventory 714,000

Highlighted items are receivables