HI5001 Lecture 9 Version 3

HI5001 Accounting for Business Decisions
Lecture 8
Receivables
Click to edit Master title style
Overview
Lecture Lecture Topic Readings/Preparation
1 Role of Accounting for Decision Making Textbook Chapter: 1
2 Financial Statements & Decision Making Textbook Chapter: 2
3 Recording Business Transactions Textbook Chapter: 3
4 Adjusting Entries & Preparing Financial Statements Textbook Chapter: 4
5 Completing The Accounting Cycle Textbook Chapter: 5
6 Accounting Systems Textbook Chapter: 7
7 Cash Management & Control Textbook Chapter: 11
8 Receivables Textbook Chapter: 12
9 Inventories Textbook Chapter: 6 & 13
10 Non-current Assets Textbook Chapter: 14 & 15
11 Liabilities Textbook Chapter: 16
12 Analysis & Interpretation of Financial Reports Textbook Chapter: 19
Applied Business Statistics for Managers Holmes Institute

Click to edit Master title style
Overview
Lecture 7 Lecture 8
B
Cash Management Receivables
B
b
and Control
Illegal

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
1 Types of Receivables
2 Accounts Receivable
3 Bad & Doubtful Debts – Allowance Method
4 Bad & Doubtful Debts – Estimating Doubtful Debts

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
5 Bad & Doubtful Debts – Writing Off Bad debts
6 Bad & Doubtful Debts – Bad Debts Recovered
7 Management of Accounts Receivable
8 Bills Receivable

Types of edit
Click to Receivables
Master title style
Receivables are categorised into different types:

▪ Accounts receivable
▪ Bills receivable
▪ Lease receivable (not covered in this subject)
▪ Other receivables
✓Loans to employees
✓Interest and rent receivable
✓Amounts receivable as a result of the sale of non-current assets
✓Short-term deposits

Types of edit
Click to Receivables
Master title style
Other Accounts
Receivables Receivable
Types of
receivables
Lease Bills
Receivable Receivable

Overview of Accounts
Click to edit Receivable
Master title style
• Accounts receivable relate to all accounts for which a

business expects to receive money in the near future.
• Credit is often extended to customers, i.e. the buyer has a
specified length of time, such as 30 or 60 days, before
payment is due.
• These customers’ accounts are called accounts receivable
or trade debtors by the entity granting credit.

Overview of Accounts
Master title style
• Accounts receivable are assets because they represent

resources controlled by the entity from which future economic
benefits are expected to flow to the entity.
• Accounts receivable arise from the sale of goods or services
on credit.
• The future economic benefits result from the right of the entity
to receive cash from customers who have been extended
credit.

Accounting
Click to editfor Receivables
Master title style
• For many business entities, the large proportion of their sales

(and can be risky)
• Accounting for Receivables

➢ Recognition
➢ Valuation
➢ Control

Recognition
Click to editofMaster
Accounts
titleReceivable
style
• Recognition
• Usually at time of sale and invoice issued
• Need to consider discounts and allowances
• An example:
When should accounts receivable be recognized?
invoice
Order Customer Customer
issued & Received
placed by made received
goods payment
customer payment goods
delivered

Valuation of Accounts
Master title style
• Valuation
• Not all amounts owing will be collected
• Bad and doubtful debts!
• A major accounting problem lies in estimating the amount of the
receivables that will become bad.
My products Issuing credit – Risk Exposure

are gone and
so is my
money.
Ordinary
Seller Customer
Bad
Click& to
Doubtful Debts title
edit Master Overview
style
▪ Risk of doing business on

credit
Let me check ▪ Minimised through credit
financials of ABC checks
Corp. We intend to
sell a large quantity
to them,.
Ordinary
Seller
Bad
Click& to
edit Master Overview
style
• Unpaid amounts represent a business expense
▪ Recognition
o In accounting, bad debts expense is commonly recognised in the same
accounting period in which the credit sales were recognised.
o Estimated at the end of the accounting period
• Written off periodically

Allowance Method
Click to edit of Accounting
Master title style for Bad Debts
• Two methods to account for bad debts
• Allowance method
• Direct write-off method
• Allowance method of accounting for bad debts
• At the end of the accounting period, before the accounting records
are closed and the financial reports prepared, an estimate is made of
the amount of accounts receivable expected to be uncollectable, i.e.
doubtful debts.
• An adjusting entry is prepared with a debit to the Bad Debts Expense
account and a credit to an account called Allowance for Doubtful
Debts.

Allowance Method
▪ Estimate of doubtful debts made at the end of the period
Adjusting entry
June 30 2015
Bad debts expense $6,000
Allowance for doubtful debts $6,000
Estimated bad debts expense

Allowance Method
▪ Allowance for doubtful debts

✓ Records the expense in same period as the income to
which it relates
✓ Creates an allowance that will be deducted from accounts
receivable on the balance sheet
✓ Allowance also known as ‘provision’
✓ AASB 137 Provisions, Contingent Liabilities and
Contingent Assets

Allowance Method
HANNAH LTD
Balance Sheet (partial)
as at 30 June 2015
CURRENT ASSETS
Cash at bank $ 58,500
Accounts receivable $110,000
Less: Allowance for doubtful debts 6,000
104,000
Inventory 71,000
TOTAL CURRENT ASSETS $233,500

Bad
Click& to
edit Master - Estimating
style Doubtful Debts
Let me estimate
the amount of
30-06-15
doubtful debts 7:15 PM
for June 2016
Applied Business Statistics for Managers Ordinary Holmes Institute

Bad
Click& to
Past Forecast
experience of future
Considerable
judgment
Bad debt
estimation
Bad
Click& to
▪ Generally based on combination of

➢ Past experience
➢ Forecasts of future economic and business conditions
▪ Involves considerable degree of judgement
▪ Two common methods
➢ Percentage of net credit sales
➢ Ageing of accounts receivable

Bad
Click& to
• Percentage of net credit sales method
• History of bad debts is analysed
• Year-end adjustment to recognise bad debts expense
• Also called the income statement approach
For example, assume past experience shows that about 1% of net credit
sales each year has been written off as bad debts and that net credit sales for
the current year amount to $847,000. the year-end adjustment to recognize
bad debts expense is:
June 30, 2015

Bad debts expense $8,470
Allowance for doubtful debts $8,470
Bad debts expense for the year, 1% x $847 000
Bad
Click& to
▪ Ageing of accounts receivable method

➢ Important to keep track so as to ensure control and
understanding of receivables
➢ It is often called the balance sheet approach
➢ Based on length of time overdue
➢ Older accounts more likely to be bad
➢ Past accounting records analysed

Bad
Click& to
Not yet No. of days overdue
Customer Balance due 1-30 31-60 61-90 91-180 >180
Apex Ltd $ 748 $ 748
Ageing of B. Brent 385 $ 385
Accounts
Carr Co Ltd 649 264 385
Receivable
method of Darnett Ltd 946 $ 462 $ 484
measuring J. Evans 517 $ 517
doubtful debts S. Fox 236 $ 236
As at 30 June
2015 … … … … … … … …
E. Ware 814 814
B. Yale 1,023 913 110
Total $91,960 $61,600 $11,660 $7,260 $4,620 $4,180 $2,640

Bad
Click& to
Age category Estimated bad Amount

Amount debts %
Ageing of Not yet due $61,600 1 $ 616
Accounts
Receivable 1-30 days overdue 11,660 5 583
method of 31-60 days overdue 7,260 10 726
measuring
doubtful debts 61-90 days overdue 4,620 20 924
As at 30 June 91-180 days overdue 4,180 30 1,254
2015
Over 180 days overdue 2,640 60 1,584
$91,960 $5,687

Bad
Click& to
• Assuming existing credit balance in the ‘Allowance for

Doubtful Debts’ account is $1,540
• Top-up needed to allow $5,687 is $4,147.
• Adjusting entry for bad debts expense:
June 30 Bad debts expense 4,147

Allowance for doubtful debts 4,147
Estimated bad debts expense for coming year

Bad
Click& to
Accounts Receivable Control
30/6 Balance 91,960
Allowance for doubtful debts

30/6 Balance c/d 5,687 30/6 Balance 1,540
Bad debts expense 4,147
$5,687 $5,687
1/7 Balance b/d $5,687

Bad
Click& to
edit Master - Writing-off
style Bad Debts
Ted, outstanding
from J Evans is
aging more than
180 days. We must
write it off in our
books.

Bad
Click& to
style Bad Debts
• When debts are considered bad rather than doubtful, the
allowance is applied to remove the receivable
• Subsidiary ledger also needs to be updated
Non-GST version:
July 31 Allowance for doubtful debts $620
Accounts receivable control – J. Evans $620
Write-off of the account receivable as uncollectible
GST version:
July 31 Allowance for doubtful debts $620

GST Collections 62
Accounts receivable control – J. Evans $682
Write-off of the account receivable as uncollectible

Bad
Click& to
style Bad Debts (cont.)
Accounts receivable control

1/7 Balance 91,960 31/7 Allow for doubtful debts 620
31/7 Balance c/d 91,340
91,960 91,960
1/8 Balance b/d 91,340
Allowance for doubtful debts
31/7 Accounts receivable-J Evans 620 1/7 Balance 5,687
31/7 Balance c/d 5,067

5,687 5,687
1/8 Balance b/d 5,067

Bad
Click& to
edit Master - Recovery
style of Accounts
Written-off
• Need to update subsidiary ledger and record cash receipt
• Recovery treated as revenue
Non-GST version:
Nov. 4 Accounts receivable control – J. Evans 250

Bad debts recovered 250
Re-establish part of account receivable written-off as bad on 31 July
GST version:
Nov. 4 Accounts receivable control – J. Evans 275
Bad debts recovered 250
GST collections 25
Re-establish part of account receivable written-off as bad on 31 July

Bad
Click& to
edit Master - Direct Write-off Method
style
• Bad debts charged to expense when debt is considered
uncollectable
• No allowance for doubtful debts is made beforehand
Non-GST version:
July 31 Bad debts expense 620
Accounts receivable control – J. Evans 620
Write-off of J. Evans account as bad
GST version:
July 31 Bad debts expense 620
GST collections 62
Accounts receivable control – J. Evans 682
Write-off of J. Evans account as bad
Click to edit Master
Pause Point 1title style
I am
incurring risk Credit Sale
exposure.
Accounts
receivable
Creditworthy
customer
Income
Allowance
Write off
for bad debt
Bad debt
recovered
Percentage Age of accounts
of sale receivable
Management & Control
Click to edit Master of style
title Accounts Receivable
• Credit policies
• Who should be offered credit?
• How much?
• What terms?
• Monitoring credit policies
• Ageing analysis of receivables
• Calculating & analysing ratios

Management
Click to edit&Master
Controltitle
of of Accounts Receivable
style
Credit policy may include
1 Who should be offered credit?
Party B
Party A Party C
Party A. As it Customers
has good
credit
worthiness.
Management
Management
Controltitle
style
2 How much credit to be offered?
Party B
Party A Party C
Customers
Ok we can issue
credit to Party A.
But can we issue
credit of $100,000 ? No. Only
$50,000 is
enough.
Management

Management
Controltitle
style
3 Terms of credit?
Party B
Party A Party C
$50,000 Ok. Customers

Illegal
Shall we take
security deposit
and what about 20% deposit
time limit? and 1 month
credit should
be fine.
Management

Management
Controltitle
style
Monitoring Credit Policies
▪ Ageing analysis of receivables
▪ Calculating and analysing ratios
➢ Receivables turnover
Receivables Net credit sales revenue

turnover = Average receivables
➢ Average collection period

Average collection 365 days
period = Receivables turnover ratio
Worked
Click toExample 1
edit Master title style
The following information for James Ltd:
2015 ($) 2014 ($) 2013 ($)
Credit sales for year 367,200 331,200 320,000
Accounts receivable at end of year 28,840 34,400 30,000
Required:
Calculate receivables turnover and average collection period
for James Ltd for 2014 and 2015.

Worked
Click toExample 1 - Solution
2015 2014
A. Net credit sales 367,200 331,200
B. Days in year 365 365
C. Average receivables 31,620 32,200
D. Receivables turnover per year = A/C 11.61 times 10.29 times
E. Average collection period = B/D 32 days 35 days
C: (O/B + C/B) / 2
D: Net credit sales divided by average receivables
E: Average collection period (days) = B/D

Worked
Click toExample 2
Calculate the average collection period for 2014 and 2015 based on the
following information provided:
2015 2014 2013

$ $ $
Credit sales for year 626,700 648,300 629,600
Accounts receivables for year 57,640 61,900 56,500

Worked
Click toExample 2 - Solution
2015 2014
A. Net credit sales 626,700 648,300
B. Days in year 365 365
C. Average receivables 59,770 59,200
D. Receivables turnover per year = A/C 10.48 times 10.95 times
E. Average collection period = B/D 34.8 days 33.3 days

Management
Controltitle
style
Application of principle of internal control
to receivables
Good credit
policy
Disintegration
Adequate Segregation of
sales & collection
Aggressive safeguard duties
function
collection
department

Management
Controltitle
style
receivable
• Disposal of accounts receivable
• Sale of accounts receivable
✓Realise cash to finance activities
✓Minimise costs of credit control
April 30 Cash at bank 490,000

Service charge exp. 10,000
Accounts Receivable Control 500,000
Sale of receivables

Management
Controltitle
style
receivable
▪ Use of credit cards
April 22 Cash at bank 2,000

Sales 2,000
MasterCard sales
April 30 Merchants’ fees expense 460

Cash at bank 460
Fees on monthly MasterCard sales for April

Management
Controltitle
style
receivable
Cash Discounts
I can offer 2%
discount for
payment to be I agree
made within 10
days.

Management
Controltitle
style
Cash Discounts
• Credit period: e.g. net 30 days, n/30
• Credit terms: e.g. 2/5, n/30
• Discount period
• Discount allowed or provided: expense account
Assume that goods were sold to A. Jones on 5 Aug for $1000, with a credit term of
1/10, n/30. A. Jones paid the amount on 10 Aug.
Aug 5 Accounts receivable 1000

Sales revenue 1000
Aug 10 Cash at bank 990

Discount allowed 10
Accounts receivable – A. Jones 1000
Bills
ClickReceivable
to edit Master title style
✓ Used for extending credit on normal trading transactions

✓ Bills of Exchange Act 1909
▪ Trade bills
▪ Promissory notes
✓ Determining due date
✓ Calculating interest on bills and notes
✓ Accounting for receipt and collection of bills

Bills
ClickReceivable
Bills of
exchange
Document
ordering
someone to pay
Amount at a
particular
time

Accounting forMaster
Click to edit Receipt title
& Collection
style of Bills Receivable
Assume CC Ltd has an account receivable from D. Mead for $1500

that is overdue. Mead requested a 90-day extension of the payment
date, and CC agreed by accepting a 90-day, 15% promissory note in
exchange for the account receivable.
Upon receipt of bill in settlement of accounts receivable–D. Mead

$1,500, 90 day bill @ 15% interest, CC Ltd makes the following entry:
July 9 Bills receivable 1,555.48
Accounts receivable – D. Mead $1,500.00
Unearned interest 55.48
Receipt of a note in settlement of accounts receivable
[Interest = $1,500 x 0.15 x 90/365]

Accounting forMaster
Click to edit Receipt title
& Collection
style of Bills Receivable
▪ Receipt of cash on payment of the note by the debtor at

maturity date
October 7 Cash at bank 1,555.48

Bills receivable 1,555.48
Collection of promissory note from D. Mead
October 7 Unearned interest 55.48

Interest income 55.48
Interest earned on note from D. Mead

Discounting
Click to editBills Receivable
Master title style
Realizing bill of entry prior to

maturity
I want to
discount my bill. Sir, let me check
What is your for particulars of
rate of bill. Ok the rate
discount? will be 10%
Applied Business Statistics for Managers

Ordinary Holmes Institute
Discounting
Master title style
Maturity Interest
value rate
Time
held

Discounting
Master title style
• Bill sold to the bank for cash
• Bank deducts interest in advance
• Advance interest referred to as ‘discount’
Discounting of bill
• Discount based on:
Seller
• maturity value Bank
Endorsed
owner
with sign
• time held of bill
& date to
Ordinary
pay
• interest rate
• Contingent liability
Face value
less
discount

Discounting
Master title style
Receipt of 90 day, 8% note dated 16 March from F Morgan to

settle debt of $2,000. The Company held note until 15 April
when it was discounted at bank at discount yield rate of 10%
Amount of debt $2,000.00

Interest on note at 8% ($2,000 x 0.08 x 90/365) 39.45
Maturity value of the promissory note $2,039.45
Less: Discount at 10% for 60 days($2,039.45 x 0.10 x 60/365) 35.53
Proceeds $2,003.92

Discounting
Master title style
▪ Entry to record discounting of note
▪ Discount on bill is offset against interest that would have been earned if bill
receivable has been held until maturity date
Cash at Bank 2003.92

Bills receivable 2039.45
Discounted F. Morgan’s note at bank @ 10%
Ordinary
April 15
Interest earned on discounted note from F. Morgan
Worked
Click toExample
Receipt of 90 day, 8.5% note dated 24th August form P.

Singleton to settle debt of $11,000. The Company held the
note until 17th September when it was discounted at bank at
discount yield rate of 10%.
Required:
a) Calculate the maturity value of the promissory note and
the proceeds.
b) Record the transaction in journal entries.

Worked
Click toExample - Solution
Receipt of a 90 day, 8.5% note dated 24th August from P. Singleton to
settle debt of $11,000. The Company held the note until 17th September
when it was discounted at bank at discount yield rate of 10%.
Amount of debt $11,000.00

Interest on note at 8.5% ($11,000 x 0.085 x 90/365) 230.55
Maturity value of the promissory note $11,230.55
Less: Discount at 10% for 65 days
($11,230.55 x 0.10 x 65/365) 200.00
Proceeds $11,030.55

Worked
Click toExample - Solution
Sep 17
Cash at Bank 11030.55
Bills receivable 11230.55
Discounted note at bank @ 10%
Ordinary
Sep 17

Interest earned on discounted note

End-of-period Adjustments
Click to edit Master for Interest Revenue
title style
• Interest is earned as time passes

• When an interest-bearing bill is held at end of accounting
period, interest revenue should be calculated and recorded
• As the term of the note expires, the unearned interest
becomes interest revenue
• Adjusting entries may be necessary at end of reporting period
to give recognition of interest revenue up to that date

Key Take
Click Aways
Summary of Lecture 8
• Types of receivables
• Accounts receivable
• Bad & Doubtful Debts – Allowance Method
• Bad & Doubtful Debts – Estimating Doubtful Debts
• Bad & Doubtful Debts – Writing Off Bad debts
• Bad & Doubtful Debts – Bad Debts Recovered
• Management and control of Accounts Receivable
• Bills receivable

End ofto
Click Lecture 8
• Recommended Readings
Hoggett & Edwards - Chapter 12
• Tutorial Questions
Hoggett & Edwards - Chapter End Questions
• Discussion Board & Drop-in Session

Post your questions in the discussion board
• Next Lecture

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HI5001 Accounting for Business Decisions

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

3 Bad & Doubtful Debts – Allowance Method

4 Bad & Doubtful Debts – Estimating Doubtful Debts

Applied Business Statistics for Managers Holmes Institute

5 Bad & Doubtful Debts – Writing Off Bad debts

6 Bad & Doubtful Debts – Bad Debts Recovered

7 Management of Accounts Receivable

Applied Business Statistics for Managers Holmes Institute

Receivables are categorised into different types:

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

• Accounts receivable relate to all accounts for which a

Applied Business Statistics for Managers Holmes Institute

• Accounts receivable are assets because they represent

Applied Business Statistics for Managers Holmes Institute

• For many business entities, the large proportion of their sales

• Accounting for Receivables

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

My products Issuing credit – Risk Exposure

▪ Risk of doing business on

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

▪ Estimate of doubtful debts made at the end of the period

Applied Business Statistics for Managers Holmes Institute

▪ Allowance for doubtful debts

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Ordinary Holmes Institute

▪ Generally based on combination of

Applied Business Statistics for Managers Holmes Institute

June 30, 2015

▪ Ageing of accounts receivable method

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Age category Estimated bad Amount

Applied Business Statistics for Managers Holmes Institute

• Assuming existing credit balance in the ‘Allowance for

June 30 Bad debts expense 4,147

Applied Business Statistics for Managers Holmes Institute

Allowance for doubtful debts

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

July 31 Allowance for doubtful debts $620

Applied Business Statistics for Managers Holmes Institute

Accounts receivable control

31/7 Balance c/d 5,067

Applied Business Statistics for Managers Holmes Institute

Nov. 4 Accounts receivable control – J. Evans 250

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

1 Who should be offered credit?

Credit policy may include

2 How much credit to be offered?

Applied Business Statistics for Managers Holmes Institute

$50,000 Ok. Customers

Applied Business Statistics for Managers Holmes Institute

Receivables Net credit sales revenue

➢ Average collection period

Credit sales for year 367,200 331,200 320,000

Accounts receivable at end of year 28,840 34,400 30,000

Applied Business Statistics for Managers Holmes Institute