Beruflich Dokumente
Kultur Dokumente
Chapter 9
Receivables
Accounts receivable
Notes receivable
Separation of duties
Objective 2 Use the allowance method to account for uncollectibles and estimate uncollectibles by the percent of sales and aging approaches.
order to increase sales. The credit department evaluates customers who apply for credit cards.
Allowance method
Aging of Receivables
Percentage of Sales
This is also called the income statement
approach. It is based on prior experience of the business. It is computed as a percentage of credit sales. It ignores the current balance of the allowance account. The percentage used is adjusted as needed to reflect collection experience.
estimates (based on prior experience) that 1% of net credit sales are uncollectible. Net credit sales for the year just ended were $500,000. What is the adjusting entry? $500,000 1% = $5,000
Dec 31, 20xx Uncollectible Account Expense 5,000 Allowance for Uncollectible Accounts 5,000 Recorded expense for the year
sheet approach because it focuses on accounts receivable. Individual accounts receivable from specific customers are analyzed according to the length of time they remain outstanding.
past collection experience indicates the following: Length of time % uncollectible 1-30 days 2.0 31-60 days 3.0 61-90 days 5.0 90 + days 8.0
% 2 3 5 8
$143,000 balance: Assume that the account currently has a credit balance of $100,000. What is the adjustment?
Aging of Receivables
Uncollectible Account Expense 43,000 Allowance for Uncollectible Accounts 43,000 To record allowance for uncollectibles
Aging of Receivables
Allowance for Uncollectible Adjustment 1,000 144,000 Adjusted balance 143,000
Amount of
UNCOLLECTIBLE ACCOUNTS RECEIVABLE
that an account will not be collected? It must be written off. How? Debit Allowance for Uncollectible Accounts. Credit Accounts Receivable.
Recoveries
How is the collection of a previously written-
off account recorded? Debit Accounts Receivable (to reinstate the account). Credit Allowance for Uncollectible Accounts. Debit Cash. Credit Accounts Receivable (to record the collection).
Objective 3
off only when it becomes uncollectible. No allowance account is created. This method is simple to use. The balance sheet is overstated. The income statement is understated.
department. The retailer is required to pay a fee (called a discount) for usage.
2
100
may be given in settlement of an account receivable. The maker pays the payee the maturity value. The maturity value includes principal plus interest.
Interest rate
Date of issue
Maturity date
the days from the date of issue. The date the note was issued is omitted. The maturity date is counted.
December 31. How much interest was earned by the bank as of December 31? $10,000 10% (31 360) = $86.11
86.11
at maturity?
February 28 Cash Note Receivable Interest Receivable Interest Revenue Record interest on note
10,250.00
10,000.00 86.11 163.89
maturity value to the new payee, then the original payee legally must pay the bank the amount due.
Reporting Receivables
Some companies report a single amount for
its current receivables in the body of the balance sheet. They use a note to the financial statements to give more details.
Objective 6
Use the acid-test ratio and days sales in receivables to evaluate a company.
Acid-Test Ratio
This is a stringent test of liquidity.
It measures the entitys ability to pay its
Acid-test ratio = (Cash + Short-term investments + Net current receivables) Total current liabilities
Days sales in average accounts receivable = Average net accounts receivable One days sales
End of Chapter 9