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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives

1.Describe the common classes of

receivables.
2.Describe the accounting for uncollectible
receivables.
3.Describe the direct write-off method of
accounting for uncollectible receivables.
4.Describe the allowance method of
accounting for uncollectible receivables.
5.Compare the direct write-off and
allowance methods of accounting for
uncollectible accounts.
Learning Objectives

6. Describe the accounting for notes

receivable.
7. Describe the reporting of receivables on
the balance sheet.
8. Describe and illustrate the use of
accounts receivable turnover and number
of days’ sales in receivables to evaluate a
company’s efficiency in collecting its
receivables.
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Classification of Receivables

o Accounts receivable are normally

expected to be collected within a relatively
short period, such as 30 or 60 days.
Classification of Receivables

o Notes receivable are amounts that

customers owe for which a formal, written
instrument of credit has been issued.
Classification of Receivables

o Other receivables expected to be collected

within one year are classified as current
assets. If collection is expected beyond
one year, these receivables are classified
as noncurrent assets and reported under
the caption Investments. Examples of
other receivables include:
 Interest receivable
 Taxes receivable
 Receivables from officers or employees
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Uncollectible Receivables

o Companies often sell their receivables to

other companies. This is called factoring
the receivables, and the buyer of the
receivables is called a factor.
Uncollectible Receivables

o Regardless of how careful a company is in

granting credit, some credit sales will be
uncollectible. The operating expense
recorded from uncollectible receivables is
called bad debt expense, uncollectible
accounts expense, or doubtful accounts
expense.
Uncollectible Receivables

o Some indications that an account may be

uncollectible include the following:
 The receivable is past due.
 The customer does not respond to the
company’s attempts to collect.
 The customer files for bankruptcy.
 The customer closes its business.
 The company cannot locate the customer.
Uncollectible Receivables

o The direct write-off method of accounting

for uncollectible receivables records bad
debt expense only when an account is
determined to be worthless. The allowance
method records bad debt expense by
estimating uncollectible accounts at the
end of the accounting period.
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Direct Write-Off Method

o On May 10, a $4,200 account receivable

from D. L. Ross has been determined to be
uncollectible.
 Direct Write-Off Method

o The account written off on May 10 is later

collected on November 21.

Reinstatement
entry

Receipt of
cash entry
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
The Allowance Method

o On December 31, ExTone Company

estimates that a total of $30,000 of the
$200,000 balance of their accounts
receivable will eventually be uncollectible.

The specific customer accounts

cannot be decreased, so a contra
account, Allowance for Doubtful
Accounts, is credited.
The Allowance Method

o The net amount that is expected to be

collected, $170,000 ($200,000 – $30,000),
is called the net realizable value (NRV) of
the receivables. The adjusting entry
reduces receivables to the NRV and
matches uncollectible expenses with
revenues.
The Allowance Method

o On January 21, John Parker’s account of

$6,000 is written off because it is
uncollectible.

Note that the allowance

account credited earlier is
debited at the write-off, not
Bad Debt Expense.
 THE
ALLOWANCE
METHOD
The Allowance Method

o During 2014, ExTone Company writes off

$26,750 of uncollectible accounts,
including the $6,000 account of John
Parker. After posting all entries to write off
uncollectible amounts, Allowance for
Doubtful Accounts will have a credit
balance of $3,250 ($30,000 – $26,750).
The Allowance Method

o If ExTone Company had written off

$32,100 in accounts receivable during
2014, Allowance for Doubtful Accounts
would have a debit balance of $2,100.
 The Allowance Method

o Nancy Smith’s account of $5,000, which

was written off on April 2, is later collected
on June 10. Two entries are needed: one to
reinstate Nancy Smith’s account and a
second to record receipt of the cash.
Reinstatement
entry

Receipt of
cash entry
Estimating Uncollectibles

o The allowance method requires an

estimate of uncollectible accounts at the
end of the period. Two methods are used
to estimate the amount debited to Bad
Debt Expense.
 Percent of sales method
 Analysis of receivables method
Percent of Sales Method

o If ExTone Company’s credit sales for the

period are $3,000,000 and it is estimated
that 3/4% will be uncollectible, Bad Debt
Expense is debited for $22,500
($3,000,000 x .0075). This approach
disregards the balance of $3,250 in the
allowance account before the adjustment.
Percent of Sales Method

o After the following adjusting entry on

December 31 is posted, Allowance for
Doubtful Accounts will have a balance of
$25,750 ($3,250 + $22,500).
 PERCENT OF
SALES METHOD
Analysis of Receivables Method

o The longer an account receivable is

outstanding, the less likely it is that it will
be collected. Basing the estimate of
uncollectible accounts on how long
specific amounts have been outstanding is
called aging the receivables.
Analysis of Receivables Method

o The analysis of receivables method is

applied as follows:
 Step 1: The due date of each account
receivable is determined.
 Step 2: The number of days each account
is past due is determined.
 Step 3: Each account is placed in an aged
class according to its days past due.
 Step 4: The totals for each aged class are
determined.
Analysis of Receivables Method

 Step 5: The total for each aged class is

multiplied by an estimated percentage of
uncollectible accounts for that class.
 Step 6: The estimated total of uncollectible
accounts is determined as the sum of the
uncollectible accounts for each aged class.
Analysis of Receivables Method

o The preceding steps are summarized in an

aging schedule, and this overall process is
called aging the receivables.
ANALYSIS OF
RECEIVABLES
METHOD
Analysis of Receivables Method

o The estimate based on the age of

receivables is compared to the balance in
the allowance account to determine the
amount of the adjusting entry.
Analysis of Receivables Method

o ExTone Company has an unadjusted credit

balance of $3,250 in Allowance for
Doubtful Accounts. In Exhibit 1, the
estimated uncollectible accounts totaled
$26,490. The amount to be added to the
allowance account is $23,240 ($26,490 –
$3,250). The adjusting entry is as follows:
Analysis of Receivables Method
o After the preceding adjusting entry is
posted to the ledger, ExTone Company’s
Allowance for Doubtful Accounts will have
an adjusted balance of $26,490. This is the
amount that was determined by aging the
accounts.

Same amount as the estimated amount

determined by the aging process.
Analysis of Receivables Method

o If ExTone Company’s unadjusted balance

of the allowance account had been a debit
balance of $2,100, the amount of the
adjustment would have been $28,590
($26,490 + $2,100).
COMPARING
ESTIMATION
METHODS
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparing Methods

o The primary differences between the

direct write-off and allowance methods are
summarized below.
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Characteristics of Notes Receivable

o A note receivable, or promissory note, is a

written document containing a promise to
pay. Characteristics of a promissory note
are as follows:
 The maker is the party making the promise
to pay.
 The payee is the party to whom the note is
payable.
 The face amount is the amount the note is
written for on its face.
(continued)
Characteristics of Notes Receivable

 The issuance date is the date a note is issued.

 The due date or maturity date is the date the
note is to be paid.
 The term of a note is the amount of time
between the issuance and due dates.
 The interest rate is the rate of interest that
must be paid on the face amount for the term
of the note.
 NOTES
RECEIVABLE
Notes Receivable

o The maturity value is the amount that

must be paid at the due date of the note,
which is the sum of the face amount and
the interest.
Due Date of a 90-day Note

o What is the due date of a 90-day note

dated March 16?
 Days in March 31
 Minus issuance date of note 16
 Days remaining in March 15
 Add days in April 30 90
 Add days in May 31 days

 Add days in June

(due date of June 14) 14
 Term of note 90 days
Alternate Approach

o Total days in note 90 days

 Number of days in March 31
 Issue date of note, March 16 (16)
 Remaining days in March days 15

 Number of days in April 30

 Number of days in May days 31
 Residual days in June (14) days

Answer: June 14
DUE DATE OF A
90-DAY NOTE
Accounting for Notes Receivable

o Received a $6,000, 12%, 30-day note

dated November 21, 2014, in settlement
of the account of W. A. Bunn Company.
Accounting for Notes Receivable

o On December 21, when the note matures,

the firm receives $6,060 from W. A. Bunn
Company ($6,000 face amount plus $60
interest).
Accounting for Notes Receivable

o If W. A. Bunn Company fails to pay the

note on the due date, it is considered a
dishonored note receivable. The note and
interest are transferred back to the
customer’s account receivable.
Accounting for Notes Receivable

o A 90-day, 12% note dated December 1,

2014, is received from Crawford Company
to settle its account, which has a balance
of $4,000.
Accounting for Notes Receivable

o Assuming that the accounting period ends

on December 31, an adjusting entry is
required to record the accrued interest of
$40 ($4,000 x 0.12 x 30/360).
Accounting for Notes Receivable

o On March 1, 2015, $4,120 is received for

the note ($4,000) and interest ($120).
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
 REPORTING
RECEIVABLES
ON THE
BALANCE SHEET
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounts Receivable Turnover

o The accounts receivable turnover

measures how frequently during the year
the accounts receivable are being
converted to cash.

Accounts
Net Sales
Receivable =
Turnover Average Accounts
Receivable
ACCOUNTS RECEIVABLE
TURNOVER
Number of Days Sales in Receivables

o The number of days’ sales in receivables is

an estimate of the length of time the
accounts receivable have been
outstanding.

Number of Days’ Average Accounts Receivable

Sales in =
Receivables Average Daily Sales
 NUMBER OF DAYS SALES IN
RECEIVABLES
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engage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.