ACCOUNTING FOR ACCOUNTING FOR RECEIVABLESRECEIVABLES

UnitUnit

88

• The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.

• Three major classes of receivables are:

1. Accounts Receivable

2. Notes Receivable

3. Other Receivables

RECEIVABLESRECEIVABLESRECEIVABLESRECEIVABLES

The three primary accounting problems associated with accounts receivable are:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

3. Disposing of accounts receivable.

ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLEACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

July 11,000

To record sales on account.

1,000

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Accounts Receivable - Adorable JuniorSales

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.

When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.

100

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited.

When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited.

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

July 5 Sales Returns and Allowances Accounts Receivable - Adorable 100 To record merchandise returned.

900

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLERECOGNIZING RECOGNIZING

ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

July 31 Cash ($1,000 - $100) Accounts Receivable - Adorable 900 To record collection of account.

When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited.

When a business collects cash from a customer for merchandise previously sold on credit, Cash is debited and Accounts Receivable is credited.

13.50

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

RECOGNIZING RECOGNIZING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

July 31 Accounts Receivable - Adorable Interest Revenue 13.50 To record interest on amount due.

When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.

When financing charges are added to a balance owing, Accounts Receivable is debited and Interest Revenue is credited.

• To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value.

• Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

VALUING VALUING ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLEVALUING VALUING

ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

• Two methods of accounting for

uncollectible accounts are:

1. Allowance method

2. Direct write-off method

VALUINGVALUING

ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

VALUINGVALUING

ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE

• Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense.

• No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet.

DIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHOD

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Jan. 12 Bad Debts Expense Accounts Receivable — E. Schaefer For write-off of E. Schaefer account.

DIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHODDIRECT WRITE-OFF METHOD

Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.

Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.

200 200

• The allowance method is required when bad debts are deemed to be material in amount.

• Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred.

THE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHOD

Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period. This journal entry is considered an adjusting entry

Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period. This journal entry is considered an adjusting entry

THE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHOD

Date Account Title and Explanation Debit CreditDec. 31 Bad Debts Expense 24,000

Allowance for Doubtful Accounts 24,000 To record estimate of uncollectible accounts.

GENERAL JOURNAL

ADORABLE JUNIOR GARMET

Balance Sheet (partial)

Current assets Cash $ 14,800

Accounts receivable $200,000Less: Allowance for doubtful accounts 24,000 188,000

Net Realizable Value

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Mar. 1 Allowance for Doubtful Accounts Accounts Receivable — Nadeau

Write-off of Nadeau account.

Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

THE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHOD

500 500

When there is recovery of an account that has been written off:

1. reverse the entry made to write off the account and ...

When there is recovery of an account that has been written off:

1. reverse the entry made to write off the account and ...

THE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHOD

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

July 1 Accounts Receivable — Nadeau Allowance for Doubtful Accounts To reverse write-off of Nadeau account.

500 500

THE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHODTHE ALLOWANCE METHOD

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

July 1 Cash Accounts Receivable —Nadeau

To record collection from Nadeau.

500 500

2. Record the collection in the usual manner.2. Record the collection in the usual manner.

SUMMARY OF TYPICAL JOURNAL ENTRIES RELATED TO RECEIVABLES – ALLOWANCE METHOD

   

Record credit sale of merchandise (assume perpetual system) [date of sale].

 (1) Accounts Receivable

Sales (2) Cost of Goods Sold

Merchandise Inventory

 Estimate and record uncollectible accounts as doubtful [end of period].

 Bad Debts Expense

Allowance for Doubtful Accounts

 Write off accounts receivable (no longer doubtful) [date of occurrence].

 Allowance for Doubtful Accounts

Accounts Receivable

 Record subsequent recovery of written off account [date of occurrence].

 (1) Accounts Receivable

Allowance for Doubtful Accounts (2) Cash

Accounts Receivable