Download Receivables

Receivables
Chapter 9
Receivables
Accounts receivable
Notes receivable
Objective 1
Design internal controls
for receivables.
Establishing Internal Control
 What are some controls over accounts
receivable?
Control over
mail receipts
Approval for
write-off
Separation
of duties
Objective 2
Use the allowance method
to account for uncollectibles
and estimate uncollectibles
by the percent of sales
and aging approaches.
The Credit Department
 Companies grant credit to customers in
order to increase sales.
 The credit department evaluates customers
who apply for credit cards.
Uncollectible Accounts Expense
Allowance method
Direct write-off method
Methods for Estimating
Uncollectible Expense
Percentage of Sales
Aging of Receivables
Percentage of Sales
 This is also called the income statement approach.
 It is based on prior experience of the business.
 It is computed as a percentage of credit sales.
 It ignores the current balance of the allowance
account.
 The percentage used is adjusted as needed to
reflect collection experience.
Percentage of Sales Example
 The credit department of Ana’s Boutique
estimates (based on prior experience) that
1% of net credit sales are uncollectible.
 Net credit sales for the year just ended
were $500,000.
 What is the adjusting entry?
 $500,000 × 1% = $5,000
Percentage of Sales Example
Dec 31, 20xx
Uncollectible Account Expense 5,000
Allowance for Uncollectible Accounts
Recorded expense for the year
5,000
Percentage of Sales Example
What is the effect of this adjusting entry?
Decrease in
Net Income
Decrease in net
Accounts Receivable
Aging of Accounts Receivable
 This approach is also called the balance
sheet approach because it focuses on
accounts receivable.
 Individual accounts receivable from specific
customers are analyzed according to the
length of time they remain outstanding.
Aging of Receivables Example
 Assume that International Hospital’s
past collection experience indicates the
following:
 Length of time % uncollectible
1-30 days
2.0
31-60 days
3.0
61-90 days
5.0
90 + days
8.0
Aging of Receivables Example
Length
1-30
31-60
61-90
90 +
Total
Amount
$1,900,000
1,000,000
700,000
500,000
$4,100,000
Accounts
Receivable
%
2
3
5
8
$ 38,000
30,000
35,000
40,000
$143,000
Allowance for
Uncollectible Accounts
Aging of Receivables Example
 The allowance account is adjusted to this
$143,000 balance:
 Assume that the account currently has a
credit balance of $100,000.
 What is the adjustment?
Aging of Receivables
Uncollectible Account
Expense
43,000
Allowance for Uncollectible
Accounts
43,000
To record allowance for uncollectibles
What if the account had a
debit balance of $1,000?
Aging of Receivables
Allowance for Uncollectible
Adjustment
1,000 144,000
Adjusted balance 143,000
Comparing the Percentage of Sales
and Aging Methods
Allowance Method
Percent of Sales Method
Aging of Accounts Receivable Method
Adjusts Allowance for
Uncollectible Accounts
Adjusts Allowance for
Uncollectible Accounts
BY
TO
Amount of
Amount of
UNCOLLECTIBLE
ACCOUNT EXPENSE
UNCOLLECTIBLE
ACCOUNTS RECEIVABLE
Writing Off
Uncollectible Accounts
 What happens when it becomes apparent
that an account will not be collected?
 It must be written off.
 How?
 Debit Allowance for Uncollectible
Accounts.
 Credit Accounts Receivable.
Recoveries
 How is the collection of a previously written-
off account recorded?
 Debit Accounts Receivable (to reinstate the
account).
 Credit Allowance for Uncollectible Accounts.
 Debit Cash.
 Credit Accounts Receivable (to record the
collection).
Objective 3
Use the direct write-off method
to account for uncollectibles.
Direct Write-Off Method
 Using this method, an account is written
off only when it becomes uncollectible.
 No allowance account is created.
 This method is simple to use.
 The balance sheet is overstated.
 The income statement is understated.
Credit Card and Bankcard Sales
 These save retailers the cost of a credit
department.
 The retailer is required to pay a fee
(called a discount) for usage.
Credit Card and Bankcard Sales
 How would Ana’s Boutique record a $100
credit card sale with a 2% service charge?
Accounts Receivable (credit card)
Credit Card Discount
Sales Revenue
To record a credit card sale of $100
less a 2% service charge fee
98
2
100
Debit Card Sales
Using a debit card is like
paying with cash.
Notes Receivable: an Overview
 A note receivable may arise from a sale or
may be given in settlement of an account
receivable.
 The maker pays the payee the maturity
value.
 The maturity value includes principal plus
interest.
Notes Receivable: an Overview
Promissory Note
$10,000.00
Nov. 30, 2004
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 2005
Payee
Plus interest at the annual
rate of 10 percent.
__________
Notes Receivable: an Overview
Promissory Note
$10,000.00
Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Principal
Notes Receivable: an Overview
Promissory Note
$10,000.00
Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Interest rate
Date of issue
Notes Receivable: an Overview
Promissory Note
$10,000.00
Nov. 30, 20x4
For value received, I promise to pay to the order of
POPULAR BANK
HOUSTON, TEXAS
TEN THOUSAND AND NO/100…………DOLLARS
ON FEBRUARY 28, 20x5
Plus interest at the annual rate of 10 percent.
__________
Maturity date
Identifying a Note’s
Maturity Date
 When the period is given in days…
– the maturity date is determined by counting
the days from the date of issue.
 The date the note was issued is omitted.
 The maturity date is counted.
Computing Interest on a Note
Principal × Rate × Time = Interest
Compute interest on the note due to Popular Bank.
Principal: $10,000
Interest: 10%
Time:
December 1, 20x4, to February 28, 20x5
$10,000 × 10% × 90 ÷ 360 = $250
Objective 4
Account for notes receivable.
Recording Notes Receivable
 Assume the accounting period ended
December 31.
 How much interest was earned by the
bank as of December 31?
 $10,000 × 10% × (31 ÷ 360) = $86.11
Recording Notes Receivable
December 31
Interest Receivable
86.11
Interest Revenue
To accrue interest on the note
86.11
Recording Notes Receivable
 How does the bank record the collection
at maturity?
February 28
Cash
Note Receivable
Interest Receivable
Interest Revenue
Record interest on note
10,250.00
10,000.00
86.11
163.89
Dishonored Notes Receivable
 If the maker of the note fails to pay the
maturity value to the new payee, then the
original payee legally must pay the bank
the amount due.
Objective 5
Report receivables
on the balance sheet.
Reporting Receivables
 Some companies report a single amount for
its current receivables in the body of the
balance sheet.
 They use a note to the financial statements
to give more details.
Objective 6
Use the acid-test ratio and days’
sales in receivables to evaluate
a company.
Acid-Test Ratio
 This is a stringent test of liquidity.
 It measures the entity’s ability to pay its
current liabilities immediately.
Acid-test ratio = (Cash + Short-term investments
+ Net current receivables) ÷ Total current liabilities
Days’ Sales in Receivables
 It is a measure of the time it takes to
collect receivables.
 A smaller number indicates a quick
conversion to cash.
Days’ Sales in Receivables
One day’s sales = Net sales ÷ 365 days
Days’ sales in average accounts receivable =
Average net accounts receivable ÷ One day’s sales
End of Chapter 9