ACCOUNTING FOR RECEIVABLES

CH:9

TYPES OF RECEIVABLES
The term receivables refers to amounts due from individuals and other companies.
Receivables are claims that are expected to be collected in cash.

They are frequently classified as (1) accounts receivable, (2) notes receivable,
and (3) other receivables.

Accounts receivable are amounts owed by customers on account. They result

from the sale of goods and services. Companies generally expect to collect these
receivables within 30 to 60 days.

Notes receivable are claims for which formal instruments of credit are issued
as proof of the debt. A note receivable normally extends for time periods of 60–90
days or longer and requires the debtor to pay interest.

Other receivables include nontrade receivables. Examples are interest

receivable, loans to company officers, advances to employees, and income
taxes refundables.

Three accounting issues associated with accounts receivable are:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Valuing Accounts Receivable

DIRECT WRITE-OFF METHOD FOR UNCOLLECTIBLE

ACCOUNTS

Bad Debts Expense 200

Accounts Receivable—M. E. Doran 200

(To record write-off of M. E. Doran

account)

ALLOWANCE METHOD FOR UNCOLLECTIBLE ACCOUNTS

The allowance method of accounting for bad debts involves estimating

uncollectible accounts at the end of each period. This provides better matching on
the income statement. It also ensures that companies state receivables on the
balance sheet at their cash (net) realizable value. Cash (net) realizable value is the
net amount the company expects to receive in cash. It excludes amounts that the
company estimates it will not collect. Thus, this method reduces receivables in the
balance sheet by the amount of estimated uncollectible receivables.

Recording Estimated Uncollectible:

Bad Debts Expense 12,000

Allowance for Doubtful Accounts 12,000

(To record estimate of uncollectible

accounts)

Recording the Write-Off of an Uncollectible Account.

Allowance for Doubtful Accounts 500

Accounts Receivable—R. A.Ware 500

(Write-off of R. A.Ware account)

Recovery of an Uncollectible Account.

 i. Accounts Receivable—R. A.Ware 500
Allowance for Doubtful Accounts 500

(To reverse write-off of R. A.Ware

account)

ii. Cash 500

Accounts Receivable—R. A.Ware 500

(To record collection from R. A.Ware)

Bases Used for Allowance Method.

 Percentage-of-Sales.
 Percentage-of-Receivables.

CREDIT CARD SALES

NOTES RECEIVABLE:

Companies may also grant credit in exchange for a promissory note. A promissory
note is a written promise to pay a specified amount of money on demand or at a
definite time. Promissory notes may be used: (1) when individuals and companies
lend or borrow money, (2) when the amount of the transaction and the
credit period exceed normal limits, or (3) in settlement of accounts receivable.

Determining the Maturity Date

Computing Interest

5000……12% FOR 3 MONTHS

5000*12%=600*3/12

11000 @12 FOR 90 DAYS=330

E9-4
SOLUTION:
 (a)

UNCOLLECTIB 0-30 31-60 61-90 OVER

LES DAYS DAYS DAYS 90
PRIOR TO 7000
JAN
JANUARY 8500
FEBRUARY 17600
MARCH 60000
Estimated 2% 5% 30% 50%
Percentage
Age of Accounts
Uncollectible
ESTD 8130 1200 880 2550 3500
UNCOLLECTIBLES

(b) BAD DEBT EXPENSE…………..DR. 8130

ALLOWANCE FOR DOUBTFUL ACCOUNTS……..CR. 8130

E9-5

2010
1. ALLOWANCE FOR DOUBTFUL ACCOUNTS…………..DR.13000
RECEIVABLES………………………………………………..CR.13
000

2. * RECEIVABLES………………DR.1800
ALLOWANCE FOR DOUBTFUL AC…………..CR 1800
**CASH…………………………DR.1800
A/C RECEIVABLES…….CR. 1800

3. BAD DEBT…………………………….DR……17000
ALLOWANCE FOR DOUBTFUL ACC……………..17000
(19000-2000)

P9-3A
(a) BAD DEBT EXPENSE………….DR. 30610
ALLOWANCE FOR DOUBTFUL ACCOUNTS…………..CR.
30610
(42610-12000)

(b) 1. ALLOWANCE FOR DOUBTFUL A/C……CR.1000

RECEIVABLES……………………………..CR……1000
(FOR WRITING-OFF)

2. *A/C RECEIVABLES………………..DR.1000
ALLOWNACE FOR DOUBTFUL A/C…..CR.1000

**CASH A/C…………..DR…..1000
A/C RECEIVBALES…………CR.1000
© BAD DEBT EXPENSE……….DR.29400
ALLOWANCE FOR DOUBTFUL A/C……CR.29400

(28600+400)