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Chapter 09 ACCOUNTING FOR RECEIVABLES PowerPoint Authors Susan Coomer Galbreath Ph D CPA Charles W Caldwell D B A CMA Jon A Booker Ph D CPA CIA Cynthia J Rooney Ph D CPA McGraw Hill Irwin Copyright 2011 by The McGraw Hill Companies Inc All rights reserved 9 2 C1 ACCOUNTS RECEIVABLE A receivable is an amount due from another party This graph shows recent dollar amounts of receivables and their percent of total assets for four wellknown companies A company must also maintain a separate account for each customer that tracks how much that customer purchases has already paid and still owes 9 3 C1 SALES ON CREDIT On 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 4 C1 SALES ON CREDIT 9 5 C1 CREDIT CARD SALES Advantages of allowing customers to use credit cards Customers Customers credit credit isis evaluated evaluated by by the the credit credit card card issuer issuer Sales Sales increase increase by by providing providing purchase purchase options options to to the the customer customer The The risks risks of of extending extending credit credit are are transferred transferred to to the the credit credit card card issuer issuer Cash Cash collections collections are are quicker quicker 9 6 C1 CREDIT CARD SALES On July 15th TechCom has 100 of credit card sales with a 4 fee and its 96 cash is received immediately on deposit 9 7 C1 CREDIT CARD SALES If 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 8 C1 INSTALLMENT ACCOUNTS RECEIVABLE Amounts owed by customers from credit sales for which payment is required in periodic amounts over an extended time period The customer is usually charged interest Ford Motor Company reports more than 75 billion in installment receivables 9 9 P1 VALUING ACCOUNTS RECEIVABLE Some customers may not pay their account Uncollectible amounts are referred to as bad debts There are two methods of accounting for bad debts Direct Write Off Method Allowance Method 9 10 P1 DIRECT WRITE OFF METHOD TechCom 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 11 P1 DIRECT 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 9 12 P1 MATCHING VS MATERIALITY 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 The direct write off method usually does not best match sales and expenses 9 13 P1 ALLOWANCE METHOD At the end of each period estimate total bad debts expected to be realized from that period s sales 1 2 Two advantages to the allowance method It records estimated bad debts expense in the period when the related sales are recorded It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected 9 14 P1 RECORDING BAD DEBTS EXPENSE 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 9 15 P1 BALANCE SHEET PRESENTATION 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 9 16 P1 WRITING OFF A BAD DEBT TechCom decides that J Kent s 520 account is uncollectible 9 17 P1 WRITING OFF A BAD DEBT The write off does not affect the realizable value of accounts receivable 9 18 P1 RECOVERING A BAD DEBT 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 On March 11 Kent pays in full his 520 account previously written off 9 19 P2 ESTIMATING BAD DEBTS EXPENSE Two Two Methods Methods 1 1 2 2 Percent Percentof ofSales SalesMethod Method Accounts AccountsReceivable ReceivableMethods Methods Percent Percentof ofAccounts AccountsReceivable Receivable Aging Agingof ofAccounts AccountsReceivable Receivable 9 20 P2 PERCENT OF SALES METHOD Bad debts expense is computed as follows 9 21 P2 PERCENT OF SALES METHOD Musicland has credit sales of 400 000 in 2011 It is estimated that 0 6 of credit sales will eventually prove uncollectible Let s look at recording Bad Debts Expense for 2011 Musicland s accountant computes estimated Bad Debts Expense of 2 400 9 22 P2 PERCENT OF RECEIVABLES METHOD 1 Compute the estimate of the Allowance for Doubtful Accounts 2 Bad Debts Expense is computed as Total Estimated Bad Debts Expense Previous Balance in Allowance Account Current Bad Debts Expense 9 23 P2 PERCENT OF RECEIVABLES METHOD Musicland has 50 000 in accounts receivable and a 200 credit balance in Allowance for Doubtful Accounts on December 31 2011 Past experience suggests that 5 of receivables are uncollectible Desired balance in Allowance for Doubtful Accounts 9 24 P2 AGING OF RECEIVABLES METHOD Classify Classifyeach eachreceivable receivable by byhow how long longititis ispast pastdue due Each Eachage agegroup groupis ismultiplied multiplied by by its its estimated estimatedbad baddebts debtspercentage percentage Estimated Estimatedbad baddebts debtsfor foreach eachgroup group are aretotaled totaled 9 25 P2 AGING OF ACCOUNTS RECEIVABLE 9 26 P2 AGING OF ACCOUNTS RECEIVABLE Musicland Musicland has has an an unadjusted unadjusted credit credit balance balance in in the the allowance allowance account account is is 200 200 We We estimated estimated the the proper proper balance balance to to be be 2 270 2 270 9 27 P2 SUMMARY OF METHODS 9 28 C2 NOTES RECEIVABLE A promissory note is a written promise to pay a specified amount of money usually with interest either on demand or at a definite future date 9 29 C2 COMPUTING MATURITY AND INTEREST The maturity date of a note is the day the note principal and interest


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