Name all Types of Receivables and the Definition
- Accounts 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).
What are Receivables?
Amounts due from individuals and other companies that are expected to be collected in cash.
Three accounting issues of Accounts Receivable
- Recognizing accounts receivable.
- records a receivable when it provides service/sales on account. - Valuing accounts receivable.
- Disposing of accounts receivable.
Methods of Accounting for Uncollectible Accounts
- Direct Write-Off
- No matching.
- Receivable not stated at cash realizable value.
- Not acceptable for financial reporting - Allowance Method
- Better matching.
- Receivable stated at cash realizable value.
- Required by IFRS
Record uncollectible Accounts Receivable
Seller records losses that result from extending credit as Bad Debt Expense.
Steps for Allowance Method for Uncollectible Accounts
- 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.
What is to do if the creditor pays although the amount is already written off?
Debit Accounts Receivable Credit Allowance for Doubtful Accounts (Reverse the write off) Debit Cash Credit Accounts Receivable
Estimating the Allowance on basis of…
- Percentage of Sale (Matching Sales and Bad Debt Expense) - Income Statement
This percentage is based on past experience and anticipated credit policy. - Percentage of receivables (Matching Accounts receivable and Allowance of Doubtful Accounts) - Statement of financial position
Aging the accounts receivable
customer balances are classified by the length of time they have been unpaid. The estimated percentage uncollectible rises over time.
Why selling receivables?
Disposing of Accounts Receivable
- Receivables may be the only reasonable source of cash.
2. Billing and collection are often time-consuming and costly.
Who buys receivables and why?
- Finance company or bank.
- 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.
Presentation of Receivables and consequences in the statement of financial position and income statement.
Statement of financial position:
- Identify in the statement of financial position or in the notes each major type of receivable.
- short-term receivables are current assets
- Report both gross amount of receivables and allowance for doubtful account.
Income Statement:
- Report bad debt expense and service charge expense as selling expenses.
- Report interest revenue under “Other income and expense.”
How to calculate the accounts receivable turnover ratio?
Net Credit Sales/Avg. Net Accounts Receivable=accounts receivable turnover
(beginning accounts receivable+ending accounts receivable)/2=Avg. Net Accounts Receivable
How to calculate average collection period in terms of days?
Days in Year/accounts receivable turnover=Average collection period in days
How to compare Average collection period in days?
Compare the number between periods (should be stable) and then to benchmark companies.
