BMGT220 CHAPTER 8 NOTES 10 20 13 Chelsea Katz Chapter 8 Receivables Receivables all money claims against other entities including people companies and other organizations selling merchandise services on account on CREDIT notes accounts receivable resulting from sales transactions trade receivables other receivables interest receivables tax receivables and receivables from officers employees collection expected within 1 year investments factoring the receivables company sells their receivables ex Macy s credit card buyer of receivables factor bad debt expense the operating expense incurred because of failure to collect receivables AKA uncollectible account expense doubtful account expense Reasons an account may become uncollectible 1 receivable is past due 2 customer does NOT respond to company s attempts to collect 3 customer files for bankruptcy 4 customer closes it s business 5 company cannot locate customer Two methods for uncollectible receivables direct write off method records bad debt expenses only when an account is determined to be worthless often used by small companies ones with few receivables allowance method accounts at the end of the accounting period records bad debt expense by estimating uncollectible GAAP requires companies with large amount of receivables to use allowance method allowance for doubtful accounts contra asset account for accounts receivable Two methods for estimating uncollectible accounts 1 percent of sales method of credit sales 2 analysis of receivables method process of analyzing the accounts receivable and aging the receivables classifying them according to various age groupings with due date being base point for determining age party making promise to pay party to whom note is payable Notes Receivable Classifications maker payee due maturity date face amount issuance date term of note interest rate note date a note is issued amount for which note is written on it s face date note is to be paid by amount of time between issuance and due dates rate of interest that must be paid in face amount for term of interest face amount interest rate term 360 days maturity value amount that s due at the maturity or due date of a note dishonored note receivable note that the maker fails to pay on due date Two financial measures evaluating efficiency of collecting receivables 1 accounts receivable turnover 2 of days sale in receivables account receivable turnover measures how frequently during year account receivable is converted into cash account receivable turnover net sales avg account receivable of days sales in receivable average account receivable average daily sales of days sales in receivable estimate in length of time account receivable have been outstanding
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