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Chapter 7

Receivables
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

Copyright 2004 South-Western, a division


of Thomson Learning. All rights reserved.
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Objectives
Objectives
1. List the common classifications of receivables.
2. Summarize and
provide
examples
of internal
After
studying
this
After
studying
this
control procedures that apply to receivables.
chapter,
you
should
chapter,
you
3. Describe the nature of andshould
the accounting for
be
be able
able to:
to:
uncollectible receivables.
4. Journalize the entries for the allowance
method of accounting for uncollectibles, and
estimate uncollectible receivables based on
sales and on an analysis of receivables.

Objectives
Objectives
5. Journalize the entries for the direct write-off
of uncollectible receivables.
6. Describe the nature and characteristics of
promissory notes.
7. Journalize the entries for notes receivable
transactions.
8. Prepare the Current Assets presentation of
receivables on the balance sheet.
9. Compute and interpret the accounts
receivable turnover and the number of days
sales in receivables.

Classification of Receivables
Accounts Receivableused for selling
merchandise or services on credit, and normally
expected to be collected in a relatively short
period.
Notes Receivableused to grant credit on the
basis of a formal instrument of credit, called a
promissory note.
Other Receivablesinclude interest receivable,
taxes receivable, and receivables from officers
and employees.

Separating
Separating the
the Receivable
Receivable Functions
Functions

Credit
Approval

Credit
Info.

Collections
Goods or
services

Sales

Acctg.
Info.

Invoice

Accounting

Acctg.
Info

Uncollectible
Uncollectible Receivables
Receivables
Companies
Companies often
often sell
sell
their
their receivables
receivables to
to other
other
companies.
companies. This
This
transaction
transaction isis called
called
factoring
factoring the
the
receivables,
receivables, and
and the
the
buyer
buyer of
of the
the receivables
receivables
isis called
called aa factor.
factor.

Uncollectible
Uncollectible Receivables
Receivables
The
TheAllowance
Allowance Method
Method
This method is consistent with the matching principle.
Management makes an estimate each year of the

portion of accounts receivable that may not be


collectible.
Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.

The
The Allowance
Allowance Method
Method
On
On December
December 31,
31, Cynthia
Cynthia Richards
Richards estimates
estimates
that
that aa total
total of
of $4,000
$4,000 of
of the
the $105,000
$105,000 balance
balance in
in
her
her companys
companys Accounts
Accounts Receivable
Receivable will
will
eventually
eventually be
be uncollectible.
uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts

4 000 00
4 000 00

The
The Allowance
Allowance Method
Method
The
The net
net amount
amount that
that isis
expected
expected to
to be
be collected,
collected,
$101,000
$101,000 ($105,000
($105,000
$4,000),
$4,000), isis called
called the
the net
net
realizable
realizable value
value (NRV).
(NRV).
The
The adjusting
adjusting entry
entry
reduces
reduces receivables
receivables to
to
the
the NRV
NRVand
and matches
matches
uncollectible
uncollectible expenses
expenses
with
with revenues.
revenues.

The
The Allowance
Allowance Method
Method
The
The
adjusting
adjusting
entry
entry fills
fills
the
the bucket.
bucket.

Adjusting
Entry

Allowance
for
Doubtful
Accounts

The
The Allowance
Allowance Method
Method

e
nc
wa
L
lo r
Al fo TFU s
t
UB un
DO co
ac

Writing
Writing off
off
accounts
accounts
empties
empties the
the
bucket.
bucket.

The
The Allowance
Allowance Method
Method
Jan. 21 Allowance for Doubtful Accounts
Accounts ReceivableJohn Parker
To write off the uncollectible
account.

On
On January
January 21,
21, John
John
Parkers
Parkers account
account totaling
totaling
$610
$610 isis considered
considered to
to be
be
uncollectible.
uncollectible.

610 00
610 00

The
The Allowance
Allowance Method
Method
Jun. 10 Accounts ReceivableJohn Parker
Allowance for Doubtful Accounts
To reinstate the account
written off on Jan. 21.

An
made
to
On
June
10,
the
An
entry
is
made
to reinstate
reinstate
Onentry
Juneis
10,
the written-off
written-off
John
Parkers
account.
account
isis collected.
John
Parkers
account.
account
collected.

610 00
610 00

The
The Allowance
Allowance Method
Method
Jun. 10 Cash

610 00

Accounts ReceivableJohn Parker


To record collection on
account.

A
Asecond
second entry
entry isis made
made to
to
record
record receipt
receipt of
of the
the cash.
cash.

610 00

The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
Uncollectible Accounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and
it is estimated that 1% will be uncollectible,
the Uncollectible Accounts Expense is $3,000.

The
The Allowance
Allowance Method
Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense

3 000 00

Allowance for Doubtful Accounts

Based
Based on
on aa Percentage
Percentage of
of Sales
Sales

3 000 00

The
The Allowance
Allowance Method
Method
Estimating
Estimating Uncollectible
Uncollectible Accounts
Accounts Expense
Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables will be
uncollectible and the Allowance for Uncollectible
Accounts currently has a balance of $510, the
Uncollectible Accounts Expense must be debited for
$2,880 ($3,390 $510).

The
The Allowance
Allowance Method
Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts

2 880 00
2 880 00

Based
Based on
on an
an Analysis
Analysis of
of Receivables
Receivables

Accounts Receivable Aging and Uncollectibles

Customer

Balance

Ashby & Co.


B. T. Barr
Brock Co.

$ 150
610
470

Saxon Woods

160

Total

$86,300

Not
Past
Due

Days Past Due


1-30

31-60

61-90 91-180 181-365

over
365

$ 150
$ 350

$260

$ 470
160
$75,000 $4,000

$3,100 $1,900 $1,200

Total
Total accounts
accounts receivable
receivable
shown
shown by
by age.
age.

$800

$300

Accounts Receivable Aging and Uncollectibles

Customer

Balance

Ashby & Co.


B. T. Barr
Brock Co.

$ 150
610
470

Saxon Woods

160

Total

$86,300

Not
Past
Due

Days Past Due


1-30

31-60

61-90 91-180 181-365

over
365

$ 150
$ 350

$260

$ 470
160
$75,000 $4,000

$3,100 $1,900 $1,200

$800

$300

10%

50%

80%

Uncollectibles
PERCENT

2%

5%

20%

30%

Uncollectible percentages based on


experience and industry averages.

Accounts Receivable Aging and Uncollectibles

Customer

Balance

Ashby & Co.


B. T. Barr
Brock Co.

$ 150
610
470

Saxon Woods

160

Total

$86,300

Not
Past
Due

Days Past Due


1-30

31-60

61-90 91-180 181-365

over
365

$ 150
$ 350

$260

$ 470
160
$75,000 $4,000

$3,100 $1,900 $1,200

$800

$300

5%

10%

50%

80%

$200

$310

Uncollectibles
PERCENT

2%

AMOUNT $3,390 = $1,500

20%
$380

30%
$360

$400

$240

Year-End
Year-End Adjustment
Adjustment for
for Uncollectibles
Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510 A
2,880 B
3,390 C
Uncollectible Accts. Expense
B

2,880

Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts

$86,300

Net realizable value

$82,910

3,390 C

Balances before adjustment

B Year-end adjustment:
$3,390 $510 = $2,880
C

Balance after adjustment

Accounting for Uncollectible Accounts Receivable


The Direct Write-Off Method
This method is not consistent with the matching
principle.
Accounts that prove to be uncollectible are written off in
the year they become worthless.
Uncollectible Accounts Expense is debited and Accounts
Receivable is credited for each such transaction.

The
The Direct
Direct Write-Off
Write-Off Method
Method
May 10 Uncollectible Accounts Expense

420 00

Accounts ReceivableD. L. Ross


To write off an uncollectible
account.

On
On May
May 10,
10, D.
D. L.
L. Ross
Rossaccount
account was
was
determined
determined to
to be
be uncollectible.
uncollectible. The
The
$420
$420 balance
balance isis written
written off
off the
the books.
books.

420 00

The
The Direct
Direct Write-Off
Write-Off Method
Method
Nov. 1 Accounts ReceivableD. L. Ross

420 00

Uncollectible Accounts Expense


To reinstate account written
off on May 10.

1st Entry
In
In November,
November, D.
D. L.
L. Ross
Ross remits
remits aa check
check
for
for $420
$420 in
in payment
payment of
of his
his account.
account.

420 00

The
The Direct
Direct Write-Off
Write-Off Method
Method
Nov. 1 Cash

420 00

Accounts ReceivableD. L. Ross


To record collection on
account.

2nd Entry
A
Asecond
second entry
entry isis needed
needed to
to record
record
receipt
receipt of
of the
the cash.
cash.

420 00

Notes
Notes Receivable
Receivable
2,500.00
$_____________

Payee
Payee
Fresno, California______________20___
March 16
06

Ninety days
________________
_AFTER DATE _______
We PROMISE TO PAY TO
THE ORDER OF ____________________________________________
Judson Company
Two
thousand five hundred 00/100--------------------------_________________________________________________DOLLARS
City National Bank
PAYABLE AT ______________________________________________
Maker
Maker
VALUE RECEIVED WITH INTEREST AT ____
10%
NO. _______
14
DUE___________________
June 14, 2006

H. B. Lane
TREASURER, WILLIARD COMPANY

Notes
Notes Receivable
Receivable
A promissory note is a written
document containing a promise to pay:

aa specific
specific amount
amount of
of money
money (principal)
(principal)

to
to aa specific
specific person
person or
or company
company (payee)
(payee)

at
at aa specific
specific place
place

on
on aa specific
specific date
date or
or upon
upon demand
demand

plus
plus interest
interest at
at aa specific
specific percentage
percentage of
of
the
the principal
principal (face)
(face) amount
amount per
per year
year

Notes
Notes Receivable
Receivable
Lets
determine
due
The
aa note
to
paid
Lets
determine
the
due
The date
date
note isisthe
to be
be
paid isis
called
the
date.
ItIt isis also
date
for
aa due
90-day
called
the
due
date.note
also
date
for
90-day
note
referred
to
as
the
maturity
date.
referred
to
as
the
maturity
date.
dated
March
16.
dated March 16.

Notes
Notes Receivable
Receivable
Total days in note
Number of days in March
Issue date of note
Remaining days in March
Number of days in April
Number of days in May
Residual days in June

90 days
31
March 16
15 days
75 days
30 days
45 days
31 days
14 days

Answer: June 14

Notes
Notes Receivable
Receivable
The
The amount
amount that
that isis due
due at
at the
the
maturity
maturity or
or due
due date
date isis called
called
the
the maturity
maturity value.
value.

Notes
Notes Receivable
Receivable
Received
Received aa $6,000,
$6,000, 12%,
12%, 30-day
30-day note
note
dated
dated November
November 21,
21, 2006
2006 in
in settlement
settlement
of
of the
the account
account of
of W.
W.A
ABunn
Bunn Co.
Co.

Notes
Notes Receivable
Receivable
Interest Calculation
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00
Maturity Value Calculation
Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Nov. 21 Notes Receivable
Sales
Received 30-day, 12% note
dated November 21, 2006.

6 000 00
6 000 00

A
A$6,000
$6,000 30-day,
30-day, 12%
12% note
note dated
dated
November
November 21
21 isis received
received from
from W.
W.A
ABunn
Bunn
Company
Company in
in exchange
exchange for
for merchandise.
merchandise.

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Cash

6 060 00

Notes Receivable

6 000 00

Interest Revenue
Received principal and interest
on matured note.

On
On December
December 21,
21, when
when the
the note
note matures,
matures,
the
the firm
firm receives
receives $6060
$6060 from
from W.
W.A.
A. Bunn
Bunn
Company
Company ($6,000
($6,000 plus
plus $60
$60 interest).
interest).

60 00

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 21 Accounts ReceivableBunn Co.
Notes Receivable
Interest Revenue
To record dishonored note and

6 060 00
6 000 00
60 00

interest.

IfIf W.
W.A.
A. Bunn
Bunn Company
Company fails
fails to
to pay
pay the
the note
note on
on
the
the due
due date,
date, itit isis considered
considered aa dishonored
dishonored note
note
receivable
receivable.. The
The note
note and
and interest
interest are
are transferred
transferred
to
to the
the customers
customers account.
account.

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 1 Notes Receivable

4 000 00

Accounts ReceivableCrawford
Company
Received note in settlement of

4 000 00

account.

A
A90-day,
90-day,12%
12% note
note dated
dated December
December 1,
1, 2006,
2006,
isis received
received from
from Crawford
Crawford Company
Company to
to settle
settle
its
its account,
account, which
which has
has aa balance
balance of
of $4,000.
$4,000.

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Dec. 31 Interest Receivable

40 00

Interest Revenue
Adjusting entry for accrued
interest.

Assuming
Assuming that
that the
the accounting
accounting period
period
ends
ends on
on December
December 31,
31, an
an adjusting
adjusting entry
entry
isis required
required to
to record
record the
the accrued
accrued interest
interest
of
of $40
$40 ($4,000
($4,000 xx 0.12
0.12 xx 30/360).
30/360).

40 00

Accounting
Accounting for
for Notes
Notes Receivable
Receivable
Mar. 1 Cash

4 120 00

Notes Receivable
Interest Receivable
Interest Revenue
Received payment on note and
interest.

4 000 00

$4,000
$4,000 xx
0.12
0.12 xx
60/360
60/360

On
On March
March 1,
1, 2004,
2004, $4,120
$4,120 isis received
received for
for
the
the note
note ($4,000)
($4,000) and
and interest
interest ($120).
($120).

40 00
80 00

Receivables
on the
Balance Sheet

Crabtree Co.
Balance Sheet
December 31, 2006
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for
doubtful accounts
Interest receivable
Merchandise inventory

$119,500
250,000
$445,000
15,000430,000
14,500
714,000

Highlighted items are receivables

Financial
Analysis and
Interpretation
Accounts Receivable Turnover
Net sales
Average accounts receivable

Accounts
Accounts Receivable
Receivable Turnover
Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Accounts receivable turnover

2006
2005
$36,000,000 $32,500,000
$ 1,080,000
1,220,000
$2,300,000
$1,150,000
31.3 times

$1,050,000
1,080,000
$2,130,000
$1,115,000
29.1 times

Use:
Use: To
Toassess
assess the
the efficiency
efficiency
in
in collecting
collecting receivables
receivables $36,000,000 $32,500,000
and
and in
in the
the management
management
$1,150,000 $1,115,000
of
of credit.
credit.

Number
Number of
of Days
DaysSales
Sales in
in Receivables
Receivables
Accounts receivable, end of year
Average daily sales
Accounts receivable,
$1,220,000end of year
=12.4 days
Average
daily sales
on account
($36,000,000
365
days)

Use:
Use: To
Toassess
assess the
the efficiency
efficiency in
in collecting
collecting
receivables
receivables and
and in
in the
the management
management of
of credit.
credit.

Chapter 7
The
The End
End