Accounting for Receivables Chapter 8 I Types of Receivables refers to the amounts due from individuals and other companies B Notes Receivable A Accounts Receivables are amounts owed by customers on account and result from the sale of goods and services are claims for which formal instruments of credit are issued as proof of the debt Formally extends the time period and requires the debtor to pay interest C Other Receivables nontraded receivables Interest receivable loans to company officers a b Advances to employees Income tax refundables c II Accounts Receivable A Recognizing Accounts receivable a Similar to chapter 5 B Valuing accounts Receivable a Bad Debts Expense way companies record credit losses as debits or Uncollectable Accounts Expense account to be uncollectible it charges the loss to Bad Debts Expense when a company determines a particular b Direct Write Off Method i Shows only ACTUAL LOSSES ii NOT GAAP approved because of Matching Principle does not match revenue and losses in the same time period involves estimating uncollectible accounts at the c Allowance Method end of each period is the net amount the company ii Allowance for Dubtful Accounts i Cash net realizable value expects to receive in cash shows the estimated amount of claims on customers that the company expects will become uncollectible in the future iii Companies estimate uncollectible accounts receivable and match against revenue in the same accounting period iv Companies debit estimated uncollectibles to Bad Debts Expense and credit them to allowance for Doubtful Accounts contra asset account through an adjusting entry at the end of each period v When companies actually write off a specific account they debit actual uncollectibles to Allowance for Doubtful accounts and credit that amount to accounts receivable d Basis for Allowance Method Value i Percentage of Receivables estimating what percentage of receivables will result in losses from uncollected accounts 1 emphaisis on balance sheet 2 Accounts receivable allowance for Doubtful accounts ii Percentage of Sales uncollected based on past experience and anticipated credit policy anticiaptinng of credit sales that will be 1 Emphasis on income Statement 2 Sales Bad Debt Expenses C Disposing of Accounts Receivable a Sale of receivables i Selling to a factor a financial company or bank that buys receivables from companies then collects payments directly from customers b Credit Cars Sales form of factoring i Parties involved 1 credit issuer independent of the retailer 2 3 the retailer the customer III Notes Receivables demand or at a definite time A Promissory Note is a written promise to pay a specified amount of money on a Maker b Payee c Determining interst date omit the date the note isissued but include the party issuing the note promise to pay party to whom payment is made due date d Computing interest i Dace value of note principal ANNUAL Interst rate time in term of one year Interest IV Statement Presentation and Analysis e Honored f Dishonored Note when the maker pays it in full at its maturity date is a note not paid in full at muturity A report highest liquidity at top of statements B Analysis asses the liquidity of receivables the ratio measures the number of times on average the company collects accounts receivable during the period a Accounts receivable Turnover Net Credit Sales Average net accounts receivable Accounts Receivable Turnover b Average Collection period Days in Years Accounts Receivable Turnover Average Collection Period in Days
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