receivables
Amounts due from individuals and other companies that are expected to be collected in cash.
amounts receivable
Amounts owed by customers that result from the sale of goods and services.
notes receivable
Written promise (as evidenced by a formal instrument) for amounts to be received.
other receivables
“Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable).
Recognizing Accounts Receivable
- Service organization - records a receivable when it provides service on account.
- Merchandiser - records accounts receivable at the point of sale of merchandise on account
Valuing Accounts Receivable
Current asset to net realizable value
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts not being collected.
Seller records losses that result from extending credit as Bad Debt Expense
Method of accounting for uncollectible accounts
- direct write-off: Theoretically undesirable: No matching, Receivable not stated at cash realizable value, Not acceptable for financial reporting
- allowance method: losses are estimated; better matching, Receivable stated at cash realizable value, Required by IFRS
allowance method
- Companies estimate uncollectible accounts receivable.
- Debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a contra-asset account).
- Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time the specific account is written off as uncollectible.
reasons why companies sell their receivables
- receivables may be the only reasonable source of cash
- billing and collection are often time-consuming and costly
Sale of receivables
- finance company or bank buys receivables from businesses and then collects the payments directly from the customers.
They typically charges a commission to the company that is selling the receivables. Fee ranges from 1-3% of the receivables purchased
credit Card sales
Recorded the same as cash sales; Retailer pays card issuer a fee of 2 to 6% for processing the transactions.
estimating allowance
- percentage of sales
- percentage of receivables
percentage of sales
Management estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy. Emphasis on Income Statement realationship
percentage of receivables
Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. emphasis on Statement of financial Position relationship
