Global College Trainin G, Teaching and Learning Materials

GLOBAL COLLEGE
Trainin g, Teaching and Learning Materials
GLOBAL COLLEGE
ACCOUNTING DEPARTMENT
BASIC ACCOUNTING WORKS LEVEL II
Unit of Competence: Develop Understanding of

Debt and Consumer Credit
Module Title: Develop Understanding of Debt
and Consumer Credit
LG Code:
BUF BAW2 10 0812
TTLM Code BUF BAW2 M10 1212
CONTENTS
PAGE
INTRODUCTION……………………………………………………
……………… 3
LO1………………………………………………………………………
…3
Identify and discuss the role of credit in
society
 The concepts and terminology of credit
 role of consumer credit
 advantages and disadvantages of credit
LO2
…………………………………………………………………………
12
Identify and discuss the range of credit options
available
 Types of credit facilities
1
TTLM Development Manual Date: october 23,2018
Compiled by:Debasa Teshome, Acct departm
GLOBAL COLLEGE
 Differences between unsecured and secured

loans
 Implications of default on secured loans
LO3 …
…………………………………………………………………..… 18
Identify and discuss costs of using credit
 Fees and costs associated with
 The features and associated risks of fixed versus
variable interest rates
 Ways to compare advertised interest rates,
LO4 …
…………………………………………………………………..… 26
Analyze and discuss the effective use of consumer
credit
 Strategies to minimize fees
 Ways to avoid credit card fraud
 Ways to compare advertised interest rates,
LO5 …
…………………………………………………………………..… 28
Manage personal credit rating and history
 The role of credit reference agencies
 credit reference reports
 Implications of establishing a poor credit history
 methods of obtaining own credit reference
report
Identify and discuss

LO1 the role of credit in
society
The concepts and terminology of credit provided by a financial institute

and debt incurred by a borrower are analyzed and discussed
The historical and current role of consumer credit within the society is
identified and advantages and disadvantages of credit use are analyzed an
discussed
The impact of consumer debt on the national economy is analyzed and
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GLOBAL COLLEGE
discussed
Information as required in a timely, accurate and

1 effective manner
The role of consumer credit

includes:
enabling approved applicants the ability to
purchase items (goods and/or services) where the
cost of the item exceeds current savings available.
dentify the Different Types of

Receivables
 The term receivables refers to amounts due from
individuals and companies.
 Receivables are claims that are expected to be
collected in cash.
 Receivables represent one of a company’s most
liquid assets.
 Receivables are frequently classified as:
 Accounts receivable:
 Are amounts owed by customers on account.
 Result from the sale of goods and services (often
called trade receivables).
 Are expected to be collected within 30 to 60 days.
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 Are usually the most significant type of claim held

by a company.
 Notes receivable:
 Represent claims for which formal instruments of
credit are issued as evidence of debt.
 Are credit instruments that normally require
payment of interest and extend for time periods of
60-90 days or longer.
 May result from sale of goods and services (often
called trade receivables).
 Other receivables:
 Nontrade receivables including interest receivable,
loans to company officers, advances to employees,
and income taxes refundable.
 Generally classified and reported as separate
items in the balance sheet.
Explain how Accounts

Receivable are Recognized in
the Accounts
Two accounting problems associated with
accounts receivable are:
1. Recognizing accounts receivable
2. Valuing accounts receivable
Recognizing accounts receivable
 Service organizations -- A receivable is recorded
when service is provided on account.
 Debit accounts receivable and credit service
revenue
 Merchandisers – A receivable is recorded at the
point of sale of merchandise on account.
 Debit accounts receivable and credit sales
 Receivable may be reduced by sales discount
and/or sales return
Ad  advantages:
va obtain and can use purchased item immediately
4
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nta minimizes the need to carry cash or write cheques

ges allows for installment payments on expensive items
an convenient form of payment when travelling,
d especially overseas
dis  disadvantages:
ad may increase cost of items purchased due to
va interest accrued
nta usually attracts other fees such as account
ges servicing fees
of can lead to compulsive buying habits
cre creates a false sense of wealth.
dit
ma
y
incl
ud
e:
Describe the Methods Used to

Account for Bad Debts
Valuing accounts receivable
 Determining the amount of
accounts receivable to report is difficult because
some receivables will become uncollectible.
 This creates bad debt expense – a
normal and necessary risk of doing business on
credit.
Two methods are used in accounting for
uncollectible accounts:
1. Direct Write-off Method
2. Allowance Method
 Direct Write-Off Method
 When a specific account is determined to be
uncollectible, the loss is charged to Bad Debt
Expense.
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 For example, assume that Warden Co. writes off

M. E. Doran’s $200 balance as uncollectible on
December 12. The entry is:
Dec. 12 Bad Debts Expense 200
Accounts
Receivable--M. E. Doran 200
(To record write-off of M. E.
Doran account)
 Bad debts expense will show only actual losses
from uncollectibles.
 Bad debts expense is often recorded in a period
different from that in which the revenue was
recorded.
 Under this method, no attempt is made to:

(1) show accounts receivable in the balance sheet
at the amount actually expected to be received;
and
(2) Match bad debts expenses to sales revenue in
the income statement.
 Use of the direct write-off method can reduce the
usefulness of both the income statement and
balance sheet.
 Unless bad debt losses are insignificant, the direct
write-off method is not acceptable for financial
reporting purposes.
Allowance Method
 The allowance method of accounting for bad debts
involves estimating uncollectible accounts at the
end of each period.
 It provides better matching of expenses and
revenues on the income statement and ensures
that receivables are stated at their cash (net)
realizable value on the balance sheet.
 Cash (net) realizable value is the net
amount of cash expected to be received. It
excludes amounts that the company estimates it
will not collect.
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 Three essential features of the allowance method

are:
1. Uncollectible accounts receivable are estimated
and matched against revenues in the same
accounting period in which the revenues occurred.
2. Estimated uncollectibles are recorded as an
increase to Bad Debts Expense and an increase to
Allowance for Doubtful Accounts (a contra asset
account) through an adjusting entry at the end of
each period.
3. Actual uncollectibles are debited to Allowance for
Doubtful Accounts and credited to Accounts
Receivable at the time the specific account is
written off as uncollectible.
Recording Estimated Uncollectibles
 Allowance for Doubtful Accounts shows the
estimated amount of claims on customers that are
expected to become uncollectible in the future.
 The credit balance in the allowance account will
absorb the specific write-offs when they occur.
 Allowance for Doubtful Accounts is not closed at
the end of the fiscal year.
 Bad Debts Expense is reported in the income
statement as an operating expense (usually a
selling expense).
Recording the Write-Off
 Under the allowance method, every bad debt
write-off is debited to the allowance account (not
to Bad Debt Expense) and credited to the
appropriate Account Receivable.
 A write-off affects only balance sheet accounts.
Cash realizable value in the balance sheet,
therefore, remains the same.
Recovery of an Uncollectible
 When a customer pays after the account has been
written off, two entries are required:
(1) The entry made in writing off the account is
reversed to reinstate the customer’s account.
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(2) The collection is journalized in the usual

manner.
 The recovery of a bad debt, like the write-off of a
bad debt, affects only balance sheet account.
In “real life,” companies must estimate the
amount of expected uncollectible accounts if they
use the allowance method.
 Frequently the allowance is estimated as a
percentage of the receivables.
 Management establishes a percentage
relationship between the amount of receivables
and expected losses from uncollectible accounts.
Compute the Interest on Notes Receivable
 A promissory note is a written promise to pay a
specified amount of money on demand or at a
definite time.
 In a promissory note, the party making the
promise to pay is called the maker.
 The party to whom payment is to be made is
called the payee.
 Notes receivable
 give the holder a stronger legal claim to assets
than accounts receivable.
 are frequently accepted from customers who need
to extend the payment of an outstanding account
receivable, and they are often required from high-
risk customers.
 notes receivable, like accounts receivable, can be
readily sold to another party. Promissory notes
are negotiable instruments.
 There are three basic issues in accounting for
notes receivable:
1. Recognizing notes receivable.
2. Valuing notes receivable.
3. Disposing of notes receivable.
Computing Interest
 The formula for computing interest is:
Face Value of Note (principle) x Annual Interest
Rate x Time (in terms of one year
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 The interest rate specified on the note is an annual

rate of interest. The time factor in the
computation expresses the fraction of a year that
the note is outstanding.
When the maturity date is stated in days, the time
factor is frequently the number of days divided by
360. For example, the maturity date of a 60-day
note dated July 17 is determined as follows:
Term of note 60 days

Days in July 31
Date of note 17
Note’s days in July 14
Days in August 31
Plus note’s days in July 14
Notes days to the end of August 45
45
Maturity date, September
15
 When the due date is stated in terms of months,
the time factor is the number of months divided by
12.
Recognizing Notes Receivable

 To illustrate the basic entry for notes receivable,
the text uses Brent Company’s $1,000, two-month,
8% promissory note dated May 1. Assume that
the note was written to settle an open account.
The entry for the receipt of the note by Wilma
Company is as follows:
May 1 Notes Receivable 1,000

Accounts Receivable
—Brent Company 1,000
(To record acceptance of
Brent Company note)
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 The note receivable is recorded at its face value,

the value shown on the face of the note.
 If a note is exchanged for cash, the entry is a debit
to Notes Receivable and a credit to Cash in the
amount of the note.
Valuing Notes Receivable
 Like accounts receivable, short-term notes
receivable are reported at their cash (net)
realizable value.
 The notes receivable allowance account is
Allowance for Doubtful Accounts.
 The computations and estimations are similar to
the ones related to accounts receivable.
Describe the Entries to Record the

Disposition of Notes Receivable
 Notes may be held to their maturity date, at which
time the face value plus accrued interest is due.
 In some situations, the maker of the note defaults,
and appropriate adjustment must be made.
 A note is honored when it is paid in full at
maturity.
 A dishonored note is a note that is not paid in full
at maturity.
Explain the Statement

Presentation of Receivables
 Each of the major types of receivables should be
identified in the balance sheet or in the notes to
the financial statements.
 Short-term receivables are reported in the current
asset section of the balance sheet below short-
term investments. These assets are nearer to cash
and are thus more liquid.
 Both the gross amount of receivables and the
allowance for doubtful accounts should be
reported.
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 Notes receivable are listed before accounts

receivable because notes are more easily
converted to cash.
 Bad Debts Expense is reported under “Selling
expenses” in the operating expense section of the
income statement.
 Interest Revenue is shown under “Other Revenues
and Gains” in the nonoperating section of the
income statement.

the range of credit
LO2
options available
2.1
2.2
Types of credit facilities used by businesses are
analyzed and compared
Types of credit facilities used by individuals
are analyzed and compared
Differences between unsecured and secured
loans are analyzed and discussed
Implications of default on secured loans are
explained to the client
1. credit facilities
escribe the Principles of Sound

Accounts Receivable
Management
 Managing accounts receivable involves five steps:
Determine to whom to extend credit.
Establish a payment period.
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GLOBAL COLLEGE
Monitor collections.
Evaluate the receivables balance.
Accelerate cash receipts from receivables when
necessary.
 Determine to whom to extend credit.
Risky customers might be required to provide
letters of credit or bank guarantees.
Particularly risky customers might be required to
pay cash on delivery.
Ask potential customers for references from banks
and suppliers and check the references.
Periodically check financial health of continuing
customers.
 Establish a payment period.
Determine a required payment period and
communicate that policy to customers.
Make sure company's payment period is
consistent with that of competitor
 Monitor collections.
Prepare accounts receivable aging schedule at
least monthly.
Pursue problem accounts with phone calls, letters,
and legal action if necessary.
Make special arrangements for problem accounts.
If a company has significant concentrations of
credit risk, it is required to discuss this risk in the
notes to its financial statements.
A concentration of credit risk is a threat of
nonpayment from a single customer or class of
customers that could adversely affect the financial
health of the company.
dentify Ratios to Analyze a

Company's Receivables
 Liquidity is measured by how quickly certain assets
can be converted into cash. The ratio used to
assess the liquidity of the receivables is the
receivables turnover ratio.
12
GLOBAL COLLEGE
 The ratio measures the number of times, on

average, receivables are collected during the
period.
 The receivables turnover ratio is computed by
dividing net credit sales (net sales less cash sales)
by the average net accounts receivables during the
year.
 A popular variant of the receivables turnover ratio
is to convert it into an average collection period in
terms of days. This is computed by dividing the
receivables turnover ratio into 365 days.
 The general rule is that the average collection
period should not greatly exceed the credit term
period (i.e., the time allowed for payment).
In some cases, receivables turnover may be
misleading. Therefore, it is important to know how
a company manages its receivables.
Consumer fixed:
credit personal loans
facilities leases including mobile phones, cars,
may business premises, office equipment includ
include: personal computers
hire purchase
'buy now, pay later' schemes
revolving:
credit cards
store cards
overdraft.
13
GLOBAL COLLEGE
Describe Methods to Accelerate

the Receipt of Cash from
Receivables
 Two common expressions apply to the collection
of receivables:
1. Time is money—that is, waiting for the normal
collection process costs money.
2. A bird in the hand is worth two in the bush—that
is, getting the cash now is better than getting it
later or not at all.
 There are three reasons for the sale of receivables.
1. The size of the receivables may cause a company
to sell them because it may not want to hold such
a large amount of receivables .
2. A final reason for selling receivables is that billing
and collection are often time-consuming and
costly.
 Three parties are involved when national credit
cards are used in making retail sales:
 (1) the credit card issuer, who is independent of
the retailer, (2) the retailer, and (3) the customer.
 A retailer’s acceptance of a national credit card is
another form of selling—factoring—the receivable
by the retailer.
There are several advantages of credit cards for
the retailer:
14
GLOBAL COLLEGE
Issuer does credit investigation of customer.

Issuer maintains customer accounts.
Issuer undertakes collection process and absorbs
any losses.
Retailer receives cash more quickly from credit
card issuer.
 To illustrate, Morgan Marie purchases $1,000 of
compact discs for her restaurant from Sondgeroth
Music Co., and she charges this amount on her
Visa First Bank Card. The service fee that First
Bank charges Sondgeroth Music is 3 percent. The
entry by Sondgeroth Music to record this
transaction is:
Cash 970
Service Charge Expense
30
Sales
1,000
(To record Visa credit card
sales)
Sale of receivables to a factor:
 A common way to accelerate receivables collection
is a sale to a factor. A factor is a finance company
or a bank that buys receivables from businesses
for a fee and then collects the payments directly
from the customers.
oring arrangements vary widely, but typically

the factor charges a commission of 1% to
3% of the amount of receivables
purchased.
erences between unsecured and secured loans

include:
 a secured loan is supported by an
underlying asset while an unsecured loan is
not
15
GLOBAL COLLEGE
cured loans attract higher interest rates due to

increased risk to the lending institution.
Im  any shortfall in sale of repossessed asset against

pli outstanding loan amount must be paid by borrower
ca  repossession of the underlying asset by the
tio lending institution.
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:
Self Check
 Define receivables. What are the different
types of receivables? Why is it necessary to have
them in different categories
 Explain how accounts receivable are
recognized in the accounts. How are accounts
receivable valued on the balance sheet?
 What methods are used to accelerate the receipt
of cash from receivables? Why do companies pay
fees for this service. Prepare journal entries for
credit card sales.

LO3
costs of using credit
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GLOBAL COLLEGE
3.1 Fees and costs associated with different

types of credit options are analyzed and
compared
3.2 The features and associated risks of fixed
versus variable interest rates are analyzed and
compared
3.3 Ways to compare advertised interest rates
and the effects of fees and charges are
analyzed and discussed
2. credit facilities
Fees and costs associated with
different credit options may include
 account servicing fees

 credit purchase fees
 late payment fees
 loan establishment fees
withdrawing from a foreign Automatic Teller
Machine (i.e. the ATM of a lending institution
other than your own).
Fees and costs may be analyzed and compared
using:
 manually, comparing fees and costs
drawn from tables and charts provided by
financial institutions and analyzed using a
calculator
17
GLOBAL COLLEGE
Procurement steps
Procurement life cycle in modern

businesses usually consists of four
steps:
 Information gathering: If the potential
customer does not already have an established
relationship with sales/ marketing functions of
suppliers of needed products and services (P/S), it
is necessary to search for suppliers who can satisfy
the requirements.
 Supplier contact: When one or more
suitable suppliers have been identified, requests
for quotation, requests for proposals, requests for
information or requests for tender may be
advertised, or direct contact may be made with
the suppliers.
 Background review: References for
product/service quality are consulted, and any
requirements for follow-up services including
installation, maintenance, and warranty are
investigated. Samples of the P/S being considered
may be examined, or trials undertaken.
 Negotiation: Negotiations are
undertaken, and price, availability, and
customization possibilities are established.
Delivery schedules are negotiated, and a contract
to acquire the P/S is completed.
W  informing the client of the 'comparison rate'

a which includes all associated fees and charges.
ys
to
co
m
p
ar
e
18
GLOBAL COLLEGE
a
d
ve
rti
se
d
in
te
re
st
ra
te
s
m
a
y
in
cl
u
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e:
Analyze and discuss

LO4 the effective use of
consumer credit
4.1 Ways to avoid excessive or unmanageable

debt are analyzed and discussed
4.2 Strategies to minimize fees on credit are
identified and discussed
4.3 The importance of meeting minimum
payments on credit cards is analyzed and
discussed
Information Sheet Strategies to minimize fees
19
GLOBAL COLLEGE
Strategies to minimize fees on credit may include:

 consolidating savings and credit
facilities with the one institution where
account servicing fees can be cancelled out
 knowing how many free transactions
come with the card
paying the minimum monthly installment on time.
Ways to avoid credit card fraud include:
 not disclosing Personal Identification
Number (PIN) to anyone
 selecting a PIN only the card holder
would know
signing the back of the credit card
Manage personal
LO5 credit rating and
history
5.1 The purpose and use of credit reference

reports in assessing loan applications is
analyzed and discussed
5.2 Implications of establishing a poor credit
history are analyzed and discussed
The right to access and methods of obtaining own
credit reference report are analyzed and discussed
3. Strategies to minimize fees
Credit reference reports refers to:
reports established and maintained by credit

reference agencies which record all negative
events (i.e. defaults) listed by creditors against
debtors.
Im  higher interest rate penalties

plic  inability to obtain finance in the future
ati  may disadvantage applications for rental
ons
20
GLOBAL COLLEGE
of accommodation
est  necessity to obtain guarantor in future loans.
abl
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a
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incl
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Methods of obtaining own credit
reference file may include:
writing, emailing or telephoning the relevant

agency requesting a copy of your file, having
provided relevant details to identify self.
Self Check
1. What are the roies of credit referens?

2. Implications of establishing a poor credit history
mayinclud ?
21

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GLOBAL COLLEGE

Trainin g, Teaching and Learning Materials

Unit of Competence: Develop Understanding of

TTLM Code BUF BAW2 M10 1212

Trainin g, Teaching and Learning Materials

 Differences between unsecured and secured

Identify and discuss

The concepts and terminology of credit provided by a financial institute

Trainin g, Teaching and Learning Materials

Information as required in a timely, accurate and

The role of consumer credit

dentify the Different Types of

Trainin g, Teaching and Learning Materials

 Are usually the most significant type of claim held

Explain how Accounts

Trainin g, Teaching and Learning Materials

nta minimizes the need to carry cash or write cheques

Describe the Methods Used to

Trainin g, Teaching and Learning Materials

 For example, assume that Warden Co. writes off

 Under this method, no attempt is made to:

Trainin g, Teaching and Learning Materials

 Three essential features of the allowance method

Trainin g, Teaching and Learning Materials

(2) The collection is journalized in the usual

Trainin g, Teaching and Learning Materials

 The interest rate specified on the note is an annual

Term of note 60 days

Recognizing Notes Receivable

May 1 Notes Receivable 1,000

Trainin g, Teaching and Learning Materials

 The note receivable is recorded at its face value,

Describe the Entries to Record the

Explain the Statement

Trainin g, Teaching and Learning Materials

 Notes receivable are listed before accounts

Identify and discuss

escribe the Principles of Sound

Trainin g, Teaching and Learning Materials

dentify Ratios to Analyze a

Trainin g, Teaching and Learning Materials

 The ratio measures the number of times, on

Trainin g, Teaching and Learning Materials

Describe Methods to Accelerate

Trainin g, Teaching and Learning Materials

Issuer does credit investigation of customer.

oring arrangements vary widely, but typically

erences between unsecured and secured loans

Trainin g, Teaching and Learning Materials

cured loans attract higher interest rates due to

Im  any shortfall in sale of repossessed asset against

Identify and discuss

Trainin g, Teaching and Learning Materials

3.1 Fees and costs associated with different

Fees and costs associated with

different credit options may include

 account servicing fees

Trainin g, Teaching and Learning Materials

Procurement life cycle in modern

W  informing the client of the 'comparison rate'

Trainin g, Teaching and Learning Materials

Analyze and discuss

4.1 Ways to avoid excessive or unmanageable