ACCOUNTING FOR RECEIVABLES-

Accounts receivable
By
Dr. Francis K Gitagia
Ph.D. , CPA(K)
Main issues related to accounts receivables- 1. Recognizing accounts receivables

When goods are sold on credit the following entries should be passed;
Dr Accounts receivables
Cr Sales
When goods are returned
Dr Return inwards
Cr Accounts receivables
Where there are sales discount and receipt of cash
Dr Cash
Dr Discount allowed-expense
Cr accounts receivables.
Illustration;

XYZ on July 1 2008 sold merchandise on account to

Polo Company for Kshs 1000 terms 2/10, n/30. On July
5 polo returned merchandise worth Kshs 100 to XYZ.
On July 11 XYZ received payment from Polo Company
for the balance due.
Show the journal entries in the books of XYZ ltd.
SOLUTION
2. Valuing Accounts Receivables.

Once company record receivables in the accounts the next question

should be how they should report receivables in the financial
statements.
 In some instances some account receivables become uncollectible
e.g. A customer may not be able to pay because of a decline in its
sales revenue due to a down turn of the economy.
Methods used in Accounting for Uncollectible accounts

1. Direct write-off method.

When a company determines a particular account to be uncollectible
it changes the losses to bad debts expense. The following entries
should be passed;
Dr Bad debt expense
Cr accounts receivables
Though this method is simple to use it reduces the usefulness of the
income statements and the balance sheet.
Methods used in Accounting for Uncollectible accounts Cont.’

2. Allowance method for uncollectible accounts.

This method involves estimating uncollectible accounts at the end of each period. This
provides a better matching on the income statements.
GAAP requires the allowance method for financial reporting purposes when bad debts
are material in amount. This method has three essential features;
i. Company estimate uncollectible accounts receivables, they match these estimated
expenses against revenues in the same accounting period in which they record the
revenues-matching
ii. Company debit the estimated uncollectible accounts receivables to bad debts
expense and credit them to allowance for doubtful accounts (a contra asset account)
iii. When company write off a specific account they debit actual uncollectible to
allowance for doubtful account and credit that amount to account receivable.
Illustration;

Assume that H furniture has credit sales of Kshs 1,200,000 in 2008, of these
amount Kshs 200, 000 remains uncollected at 31 December. The credit
manager estimates that Kshs 12,000 of these sales will be uncollectable.
The adjusting entry to record the estimated uncollectable is;
• Dr Bad debt expense 12,000
• Cr allowance for doubtful account 12,000
The credit balance in the allowance account will absorb the specific write
offs when they occur. The following entry will be passed.
• Dr Allowance for doubtful accounts
• Cr specific account receivable.
Illustration cont.’

Assume that the management of H furniture authorizes a write off of

the Kshs 500 balance owed by j. mutual. Show the entry to record the
write off.

• Dr allowance for doubtful debt 500

• Cr j. mutual (specific account receivable) 500
Recovery of Uncollectable accounts.

Occasionally a company collects from a customer after it has written

off the accounts as uncollectable. The company makes two entries.
To reinstate the debt-cancelled
• Dr specific account receivable
• Cr allowance for doubtful debts
To receive this amount.
• Dr Cash
• Cr account receivable (specific a/c)
Illustration

Assume that facts as in the previous example but now j. mutual agree
and pay the Kshs 500 owed by him.
To reinstate the debt;
• Dr j. mutual (a/c receivable) 500
• Cr allowance for doubtful debt 500
To receive cash;
• Dr cash 500
• Cr account receivable -J. Mutual 500
BASIS USED FOR ESTIMATING THE
BAD DEBTS
A company may use;
1. A percentage of sales method
• Management estimates what % of credit sales will be uncollectable. This
percentage is based on past experience.
Illustration;
Assume that Company uses the percentage of sales basis. It concludes that 1% of
the net credit sales will be uncollectable.
Show the adjusting entry of the credit sales of 2008 are Kshs 800,000.
1%*800,000=8,000
• Dr bad debt expense 8,000
• Cr allowance for doubtful debt 8,000
2. Percentage of receivables.-aging
schedules

Under this method, management estimates what percentage of

receivables will result in losses from uncollectable accounts.
The company prepares an Aging Schedule in which it classifies
customer’s balances by the length of time they have been unpaid.
Because of its emphasis on time, the analysis is often called Aging the
accounts receivables.
3. DISPOSING OF ACCOUNTS RECEIVABLES.

In the normal course of events, companies’ collects accounts

receivables in cash and remove the receivables from the books.
However as credit sales and receivables have grown insignificant the
normal course of events has changed.
Company now frequently sale their receivables to a factor for the
following reasons;
i. They may be the only reasonable source of cash.
ii. Billing and collection are often time consuming and costly.
Sales of receivables to a factor.
A common sale of receivables is to a factor- a factor is a finance
company or bank that buys receivables from business and then
collects the payment directly from the customer.
The following accounts should be passed
• Dr Cash
• Dr service charge expense
• Cr account receivables.
Illustration
XYZ wholesalers has been expanding faster than it can raise capital
according to its local banker the company has reached its debt
cutting. XYZ customers are slowing paying (60-90 days) but its
suppliers (creditors) are demanding 30 days payment.
 XYZ has a cash flow problem, it needs ksh 120,000 in cash to safely
cover next Friday employees payroll.
Its balance of outstanding receivables totals ksh 750,000.
What can XYZ do to alleviate its cash crunch? Record the entry that
XYZ make when it raises the needed cash.
Solution
Xyz could sell its recoverable to a factor totaling to ksh. 750,000 in
order to raise the cash needed or solve the cash crisis.
Suppose the interest is 5% that the factor charges, the accounting
entries will be;
• Dr cash 712,500
• Dr interest 37,500
• Cr a/c receivable 750,000
The end