ACCOUNTING FOR RECEIVABLESACCOUNTS RECEIVABLESALES ON CREDITSlide 4CREDIT CARD SALESSlide 6Slide 7INSTALLMENT ACCOUNTS RECEIVABLEVALUING ACCOUNTS RECEIVABLEDIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHOD – RECOVERING A BAD DEBTMATCHING VS. MATERIALITYALLOWANCE METHODRECORDING BAD DEBTS EXPENSEBALANCE SHEET PRESENTATIONWRITING OFF A BAD DEBTSlide 17RECOVERING A BAD DEBTESTIMATING BAD DEBTS EXPENSEPERCENT OF SALES METHODSlide 21PERCENT OF RECEIVABLES METHODSlide 23AGING OF RECEIVABLES METHODAGING OF ACCOUNTS RECEIVABLESlide 26SUMMARY OF METHODSNOTES RECEIVABLECOMPUTING MATURITY AND INTERESTINTEREST COMPUTATIONRECOGNIZING NOTES RECEIVABLERECORDING AN HONORED NOTERECORDING A DISHONORED NOTERECORDING END-OF-PERIOD INTEREST ADJUSTMENTSSlide 35DISPOSAL OF RECEIVABLESACCOUNTS RECEIVABLE TURNOVERGLOBAL VIEWEND OF CHAPTER 09PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.ACCOUNTING FOR RECEIVABLESChapter 099 - 2ACCOUNTS RECEIVABLEC1A receivable is an amount due from another party. A company must also maintain a separate account for A company must also maintain a separate account for each customer that tracks how much that customer each customer that tracks how much that customer purchases, has already paid, and still owes.purchases, has already paid, and still owes.This graph shows recent dollar amounts of receivables and their percent of total assets for four well-known companies.9 - 3SALES ON CREDITC1On July 1, TechCom had a credit sale of $950 to CompStore and a collection of $720 from RDA Electronics from a prior credit sale.9 - 4SALES ON CREDITC19 - 5CREDIT CARD SALESAdvantages of allowing customers to use credit cards:Customers’ credit is evaluated by the credit card issuer.Customers’ credit is evaluated by the credit card issuer.The risks of extending credit are transferred to the credit card issuer.The risks of extending credit are transferred to the credit card issuer.Cash collections are quicker.Cash collections are quicker.Sales increase by providing purchase options to the customer.Sales increase by providing purchase options to the customer.C19 - 6CREDIT CARD SALESC1On July 15th, TechCom has $100 of credit card sales with a 4% fee, and its $96 cash is received immediately on deposit.9 - 7CREDIT CARD SALESC1If instead TechCom must remit electronically the credit card sales receipts to the credit card company and wait for the $96 cash payment, we will make the first entry on July 15, and the second entry on July 20, when the cash is received.9 - 8Amounts owed by customers from credit sales for Amounts owed by customers from credit sales for which payment is required in periodic amounts over which payment is required in periodic amounts over an extended time period. The customer is usually an extended time period. The customer is usually charged interest.charged interest.C1Ford Motor Company reports more than $75 billion in installment receivables. INSTALLMENT ACCOUNTS RECEIVABLE9 - 9VALUING ACCOUNTS RECEIVABLEP1There are two methods of accounting for bad debts:Direct Write-Off MethodAllowance MethodSome customers may not pay their account. Uncollectible amounts are referred to as bad debts.9 - 10DIRECT WRITE-OFF METHODP1TechCom determines on January 23 that it cannot collect $520 owed to it by its customer J. Kent.Notice that the specific customer is noted in the transaction so we can make the proper entry in the customer’s Accounts Receivable subsidiary ledger.9 - 11DIRECT WRITE-OFF METHOD –RECOVERING A BAD DEBT On March 11, J. Kent was able to make full payment to TechCom for the amount previously written-off.P19 - 12MATCHING VS. MATERIALITYP1The direct write-off method usually does not best match sales and expenses. The matching (expense recognition) principle requires expenses to be reported in the same accounting period as the sales they helped produce. Materiality states that an amount can be ignored if its effect on the financial statements is unimportant to users’ business decisions.9 - 13ALLOWANCE METHODTwo advantages to the allowance method:1. It records estimated bad debts expense in the period when the related sales are recorded.2. It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.At the end of each period, estimate total bad debts expected to be realized from that period’s sales.P19 - 14RECORDING BAD DEBTS EXPENSETechCom had credit sales of $300,000 during its first year of operations. At the end of the first year, $20,000 of credit sales remained uncollected. Based on the experience of similar businesses, TechCom estimated that $1,500 of its accounts receivable would be uncollectible.TechCom had credit sales of $300,000 during its first year of operations. At the end of the first year, $20,000 of credit sales remained uncollected. Based on the experience of similar businesses, TechCom estimated that $1,500 of its accounts receivable would be uncollectible.P19 - 15BALANCE SHEET PRESENTATIONTechCom had credit sales of $300,000 during its first year of operations. At the end of the first year, $20,000 of credit sales remained uncollected. Based on the experience of similar businesses, TechCom estimated that $1,500 of its accounts receivable would be uncollectible.TechCom had credit sales of $300,000 during its first year of operations. At the end of the first year, $20,000 of credit sales remained uncollected. Based on the experience of similar businesses, TechCom estimated that $1,500 of its accounts receivable would be uncollectible.P19 - 16WRITING OFF A BAD DEBTTechCom decides that J. Kent’s $520 account is uncollectible.TechCom decides that J. Kent’s $520 account is uncollectible.P19 - 17WRITING OFF A BAD DEBTThe write-off does not affect the realizable value of accounts receivable.P19 - 18RECOVERING A BAD DEBTOn March 11, Kent pays in full his $520 account previously written off.To help restore credit standing, a customer sometimes volunteers to pay all or part of the amount owed on an account even after it has been written off.P19 - 19ESTIMATING BAD DEBTS EXPENSETwo Methods 1. Percent of Sales Method 2. Accounts Receivable MethodsPercent of Accounts ReceivableAging of Accounts ReceivableTwo Methods 1. Percent of Sales Method 2. Accounts Receivable MethodsPercent of Accounts