Instructor: Dr. Ahmed ZakiPrinciples of Accounting I - ACC 212.02

April 19th, 2014Presenter: Phanara Mao

Accounting Principles : Accounting For Receivables

Objectives

Definition of Receivables

Identify The Different Types of Receivables

Explain How Company Recognize Receivables

Methods and Bases Company Use To Value Account Receivables

Record The Disposition of Account Receivables

Determining Maturity date

Computing The Interest On Note Receivables

Describe The Statement Presentation and Analysis of Receivables

Definition of Receivables

Receivables refer to the amount due from

individuals and other companies that are

expected to be collected in cash (Kieso,

D. W., & Weygandt, J. J. 2012).

Different Types of Receivables

Account Receivables Amounts customers owe on account

Note Receivables Claims for which lenders issue formal

instruments of credit as proof of debt Other Receivables refer to Nontrade

Receivables Interest Receivables Loan to company officers Advances to employees Income Taxes Refundable…

Account Receivables

Three Issues Associate With Account Receivables

1.Recognizing Accounts Receivable. Reporting or recording account receivables

2.Valuing Accounts Receivable. Counting

3.Disposing of accounts receivable. Cancelling account receivable when the cash is

received

Accounts Receivable

Recognizing Accounts Receivable

Ex1. Service organization

- Records a receivable when it provides service on account.

Ex2. Merchandiser

- Records accounts receivable at the point of sale of

merchandise on account.

Accounts Receivable

Practice Recognizing Accounts Receivable

Illustration1: Assume that ABC Company. on July 1, 2012, sells

merchandise on account to ERV Company for $10,000 terms 2/10,

n/30. Prepare the journal entry to record this transaction on the books

of ABC Company.

Solution:

Date Description Dr. ($) Cr. ($)

July 01. Account receivable 10,000

Sales Revenue 10,000

Practice Recognizing Accounts ReceivableIllustration2: On July 5, ERV returns merchandise worth $1000 to ABC Company.

Sales returns and allowances 1000Jul. 5Accounts receivable 1000

Illustration3: On July 11, ABC Companyreceives payment from ERV Company for the balance due.

Cash 8820Jul. 11Sales discounts ($9000 x .02) 180

Accounts receivable9000

Accounts Receivable

Account Receivables

Valuing Account ReceivablesThere are two methods of accounting for uncollectible accounts;The allowances method

No matching.

Receivable not stated at cash realizable value.

Not acceptable for financial reporting.

The direct write-off method Better matching.

Receivable stated at cash realizable value.

Required by GAAP.

Accounts Receivable

Disposing of Accounts Receivable

In the normal course of events, companies collect

accounts receivable in cash and remove the receivables

from the books.

Dr. Cash

Cr. Account Receivable

Note Receivables

Issues Associate With Notes Receivable

1.Determining Maturity Date

2.Computing Interest

3.Recognizing Notes Receivable. Reporting or recording notes receivable

4.Valuing Notes Receivable. Counting

5.Disposing of Notes Receivable. Cancelling notes receivable when the cash is

received

Note expressed in terms of

Months

Days

Ex. Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 12% note dated May 10 in settlement of Leonard’s overdue account. (a) What is the maturity date of the note?

Determining the Maturity Date

Notes Receivables

Solution(a) The maturity date is August 8, computed as follows.Term of note: 90 daysMay (31-10) 21June 30July 31 82Maturity Date: August 8

Note Receivables

Computing The Interest On Note ReceivablesI = P x R x T

I : Interest (Currency. Ex. $, …)

P: Face Value of Note (Currency. Ex. $, …)

R: Annual Interest Rate ( Percentages of 100)

T: Time Taken ( Years)

Ex. Notes Receivables Include the Following;

Date Maker Face Term Interest Rate

May 16. Baylor $ 6,000 60days 10%

May 25. Feltor $ 25,000 60days 09%

May 30. ERV $ 15,000 6 months 08%

Note Receivables

Computing The Interest On Note ReceivablesFormula P x T x R = Interest

Date Maker Face Term Interest Rate

May 16. Baylor $ 6,000 60days 10% = a) $ 100

May 25. Feltor $ 25,000 60days 09% = b) $ 375

May 30. ERV $ 15,000 6 months 08% = c) $ 600

Computation

a). $ 6,000 x 60/360 x 10% = $ 100

b). $ 25,000 x 60/360 x 09% = $ 375

c). $ 15,000 x 6/12 x 08% = $ 600

Statement Presentation and Analysis of Receivables

Presentation

Identify in the balance sheet or in the notes each major

type of receivable.

Report short-term receivables as current assets.

Report both gross amount of receivables and allowance

for doubtful account.

Report bad debts expense and service charge expense

as selling expenses.

Report interest revenue under “Other revenues and

gains.”

Analysis

Statement Presentation and Analysis

Illustration: In 2009 Cisco Systems had net sales of $29,131

million for the year. It had a beginning accounts receivable (net)

balance of $3,821 million and an ending accounts receivable (net)

balance of $3,177 million. Assuming that Cisco’s sales were

all on credit, its accounts receivable turnover ratio is computed as

follows.

Source: Kieso, D. W., & Weygandt, J. J. (2012). Study guide [to accompany] Accounting principles, 10th edition, Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel. Hoboken, NJ: John Wiley &Sons.

Analysis

Statement Presentation and Analysis

Illustration: Variant of the accounts receivable turnover ratio is

average collection period in terms of days.

Source: Kieso, D. W., & Weygandt, J. J. (2012). Study guide [to accompany] Accounting principles, 10th edition, Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel. Hoboken, NJ: John Wiley &Sons.

References

Kieso, D. W., & Weygandt, J. J. (2012). Study guide [to accompany] Accounting principles, 10th edition, Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel. Hoboken, NJ: John Wiley &Sons.

Zaki, A. (Director) (2014, May 19). Accounting For Receivable . Accounting Principles 212.02. Lecture conducted from Zaman University, Phnom Penh.

This is the time for Questions.

Thank You!