CHAPTER 6CHAPTER 6Accounts Receivable andAccounts Receivable andNotes ReceivableNotes Receivable

Accounts ReceivableAccounts Receivable•• Accounting for estimated bad debtsAccounting for estimated bad debts

•• Estimating bad debtsEstimating bad debts

•• Writing off an accountWriting off an account

•• Accounting for recoveriesAccounting for recoveries

•• PresentationPresentation

• Allowance method

• Direct write-off method

Income StatementIncome StatementApproachApproach

Balance SheetBalance SheetApproachApproach

• Not GAAP• Allowance for Doubtful Accounts

= previous balance plus amount estimated to beuncollectible• Bad Debts Expense = estimated uncollectibles• Used for interim reporting

• Not GAAP• Allowance for Doubtful Accounts

= previous balance plus amount estimated to beuncollectible• Bad Debts Expense = estimated uncollectibles• Used for interim reporting

Amount estimated to be uncollectible is $10,000

Allowance for Doubtful Accounts2,500

12,500

Bad Debts Expense 10,000Allowance for Doubtful Accounts 10,000

10,00010,000

Full estimated amount is added to the balanceFull estimated amount is added to the balance

• GAAP•Allowance for Doubtful Accounts

= estimated uncollectibles• Bad Debts Expense

= amount required to bring Allowance for Doubtful Accounts to estimated uncollectibles•Net Accounts Receivable = net realizable value

• GAAP•Allowance for Doubtful Accounts

= estimated uncollectibles• Bad Debts Expense

= amount required to bring Allowance for Doubtful Accounts to estimated uncollectibles•Net Accounts Receivable = net realizable value

Amount estimated to be uncollectible is $10,000

Allowance for Doubtful Accounts2,500

10,000

Bad Debts Expense 7,500Allowance for Doubtful Accounts 7,500

7,500

Balance in allowance account is amount estimated to be uncollectibleBalance in allowance account is amount estimated to be uncollectible

Bad Debts Expense 1,000Accounts Receivable -- Abbott 1,000

• Not GAAP•When an account becomes

uncollectible, it is written off• Does not use an allowance account

• Not GAAP•When an account becomes

uncollectible, it is written off• Does not use an allowance account

• Aging of accounts receivable• Percent of accounts receivable• Percent of sales

Aging ofreceivablesAging of

receivablesPercent ofreceivablesPercent ofreceivables

Percent ofsales

Percent ofsales

Emphasis onrealizable

value

Emphasis onrealizable

value

Emphasis onrealizable

value

Emphasis onrealizable

valueEmphasis on

matchingEmphasis on

matching

A/RA/R

ADAADA

A/RA/R

ADAADA

SalesSales

BD expBD exp

Balance Sheet

Method

Balance Sheet

Method

BalanceSheet

Method

BalanceSheet

Method

IncomeStatementMethod

IncomeStatementMethod

Of the $43,000 accounts receivable, you expect not tocollect $1,890. NRV = $43,000 – $1,990 = $41,110.

Of the $43,000 accounts receivable, you expect not tocollect $1,890. NRV = $43,000 – $1,990 = $41,110.

1,125 375 220 170 1,890 Expected value

0.15 0.05 0.02 0.01 Estimated uncollectible

7,500 7,500 11,000 17,000 43,000 Total

500 1,000 1,500 Malcolm's Studio

2,500 2,500 Spectra Fashions

5,000 5,000 5,000 10,000 25,000 Jabot Cosmetics

2,000 5,000 3,000 10,000 Forrester Creations

1,000 2,000 3,000 Fenmore Stores

1,000 1,000 Crimson Lights

> 90 days> 60 days> 30 daysCurrentBalanceAccount

Percent of Accounts ReceivablePercent of Accounts Receivable(Balance Sheet Approach)(Balance Sheet Approach)

Total Accounts Receivable X percent estimated to be uncollectible

$43,000 X 0.043% = $1,849

Percent of SalesPercent of Sales(Income Statement Approach)(Income Statement Approach)

Net Credit Sales X percent estimatedto be uncollectible.

$1,000,000 X 0.0019 = $1,900

Writing off an account – Allowance Method

The account of Spectra Creations Ltd. isdetermined to be uncollectible. The entry is

Allowance for Doubtful Accounts 2,500Accounts Receivable – Spectra Creations Ltd 2,500

Writing off an account Writing off an account –– Allowance MethodAllowance Method

The account of Spectra Creations Ltd. isdetermined to be uncollectible. The entry is

Allowance for Doubtful Accounts 2,500Accounts Receivable – Spectra Creations Ltd 2,500

Remove the amount from theAllowance account and from the Accounts Receivable account. Thisis no longer an asset – it has no future benefit.

Remove the amount from theAllowance account and from the Accounts Receivable account. Thisis no longer an asset – it has no future benefit.

Received cheque from Spectra Received cheque from Spectra Creations Ltd. for $2,500.Creations Ltd. for $2,500.

Step One Step One –– Reverse the write offReverse the write off

Accounts Receivable Accounts Receivable –– Spectra Creations Ltd.Spectra Creations Ltd. 2,5002,500Allowance for Doubtful AccountsAllowance for Doubtful Accounts 2,5002,500

Step Two Step Two –– Record the receipt of the Record the receipt of the chequecheque

CashCash 2,5002,500Accounts Receivable Accounts Receivable –– Spectra Creations Ltd. Spectra Creations Ltd. 2,5002,500

2,500.00Forrester

Balance SheetBalance SheetCashCash $100,000$100,000Accounts ReceivableAccounts Receivable $300,000$300,000Less: AllowanceLess: Allowancefor Doubtful Accounts for Doubtful Accounts 10,00010,000 290,000290,000

Income StatementIncome StatementRevenueRevenue $2,000,000$2,000,000Operating Expenses Operating Expenses Bad Debts ExpenseBad Debts Expense 7,5007,500

Internal

ControlsInternal

ControlsCreditPolicy

CreditPolicy

CreditTermsCreditTerms

How long does it take to collect accounts?

Net Credit Sales / Average Accounts Receivable= number of times receivables is collected duringthe year.

365 days / number of times Accounts Receivableis collected = number of days it takesto collect accounts, on average.

see see page 249page 249

The Nature of InterestThe Nature of InterestAccounting for Notes ReceivableAccounting for Notes Receivable

PrincipalPrincipal

Interest RateInterest RateInterest Rate

TimeTimeTime

for Notes Receivablefor Notes Receivable

Recording the note transactionRecording the note transaction

Notes ReceivableNotes Receivable 168,400168,400CashCash 168,400168,400

for Notes Receivablefor Notes Receivable

Recording interest at year endRecording interest at year end

Interest ReceivableInterest Receivable 4,2104,210Interest RevenueInterest Revenue 4,2104,210

for Notes Receivablefor Notes Receivable

Recording the collectionRecording the collection

CashCash 176,820176,820Notes ReceivableNotes Receivable 168,400168,400Interest ReceivableInterest Receivable 4,2104,210Interest RevenueInterest Revenue 4,2104,210

for Notes Receivablefor Notes Receivable

If the maker defaultsIf the maker defaultsAccounts ReceivableAccounts Receivable 176,820176,820

Notes ReceivableNotes Receivable 168,400168,400Interest ReceivableInterest Receivable 4,2104,210Interest RevenueInterest Revenue 4,210 4,210

Current assetsCurrent assets

Other assetsOther assets

CurrentportionCurrentCurrentportionportion

Long termportion

Long termLong termportionportion