acc 106 account receivables

8/8/2019 Acc 106 Account Receivables

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ACCOUNTING FORRECEIVABLES


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LEARNING OBJECTIVES

After studying this chapter, you should be able to:

Differentiate between bad debts and doubtful debts

Differentiate between discounts allowed and discount

allowable Make adjustment on account receivables for bad

debts and bad debts recovered

Calculate increase/decrease in allowance for doubtful

debts and allowance for discounts allowable

Record the bad debts, bad debts recovered, doubtful

debts, increase/decrease in allowance of doubtful

debts, discount allowed and increase/decrease in

allowance of discount allowable in the journals and

ledger.


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INTRODUCTION

The selling of goods can be made on either a cash or on a creditbasis.

The practise of selling on credit, rather than by cash, is becomingmore and more common to increase the volume of sales of abusiness. This extension of credit has given rise to debtors oraccount receivable.

Businesses believe that credit sales encourage people to purchasegoods that would otherwise not have been bought at all if cashterms were demanded. For example, in retail businesses, the

purchaser may not have enough cash available to make the purchase.In addition, if a business does not give credit to its customers, itmay lose these customers to other businesses that are willing togive credit.


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INTRODUCTION

Journal entry to record cash sales:

DR Bank account

CR S

ales Account

Journal entry to record credit sales:

DR Account Receivable Account

CR Sales Account


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Accounts Receivable

Accounts receivable refers to those accounts whicharise from the sale of goods and services on credit inthe ordinary course of businesses.

These customers accounts are called accountsreceivable or trade debtors.

Accounts receivable are classified as current assets

in the Balance Sheet since they are expected to becollected in cash within the entitys next financialyear.


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Recognition of Account Receivables

Under the accruals concept, accounts receivable arerecognized when goods and services are provided andinvoices issued to the customers. For example, whencredit sale is made, the sale is recognized at the time

that the invoice is sent to the customer.

In addition, the realization concept allows gains orprofits, such as those made on sales, to be recognizedand accounted for at the time that transaction is madeand the receipt of cash is reasonably certain.Therefore, there is no necessity to wait until the cashis received before the sale is recognized. Thus, theaccounting entries made at that time are as follows:


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Recognition of Account Receivables

DR Account Receivable Account

CR Sales Account


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Account Receivables:Bad Debts

When a business sells goods on credit, debtors/accountreceivables are created.

Most debtors are expected to and will actually pay theamounts owing by them to the business. However, thereare always some who will not be able or are unwilling torepay the amounts owing by them. The reasons for thismay include financial difficulties or dishonesty.

When a debtor is not able to pay the amount that heowes such as for example, when he is facing somefinancial difficulty, then the debt is said to beuncollectible by the business.


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Account Receivables:Bad Debts

Once a debt is proven to be uncollectible orbad, in whole or in part, the amount that is

proven to be uncollectible will be considered abad debt expense.


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Account Receivables:Doubtful Debts

At the end of an accounting period, a business will stillhave debtors.

There is a possibility that some of these existingdebtors will not pay for the amounts owing. As such anestimate has to be made of the amount that willprobably not be collected. This amounts that may notbe collected are called doubtfuldebts.


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Account Receivables:Provision fordoubtful debts

At any moment in time, the business is not certain whoare likely to be bad and how much are likely to be bad.As a result of this, at the end of an accounting period,an estimate must be made on how much of the debtors

will go bad.

A provision on the debt owing to the business that maynot be settled in the future is known as provision fordoubtful debt.

The reason for providing for doubtful debts is so thatthe business will not overcast/overstate its profitsfigure or undercast/understate its losses.


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Bad Debt Recovered

The receipt of payment to an account which

was earlier written off as a bad debt isdeemed to be recoveryof a baddebt(baddebts recovered)


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ACCOUNTING FOR BAD DEBTS

There are two methods to account for

bad debt. They are

Direct method (inthe syllabus)

Allowance method


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Bad Debts

Baddebt

DR Bad debt account XXXX

CR Account receivable account XXXX(torecord baddebt writtenoff)

DR Income Statement XXXX

CR Bad debt account XXXX

(to transfer baddebtexpense to incomestatement)


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Bad Debts Example

A customer Encik Salim has a debit balance of RM800 in

his account and he failed to pay his debt. The amount

(RM800) is then considered as bad debt.

Youarerequired to prepare:

1. The journal entries to record the above transactions

2. The relevant ledger accounts

3. An extract income statement

4. An extract balance sheet


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Bad Debts Recovered

BaddebtrecoveredItis possible for a debt, which, was writtenoff as bad inone

accountingperiod,isthenunexpectedreceivedinthesubsequent

accountingperiod. Underthissituationtheaccountreceivable

needtobereinstated.

DR Accountreceivablecontrolaccount XXX

CR Baddebtrecoveredaccount XXX

(tore-establish theaccountreceivable writtenoff as bad)

DR Cashaccount XXX

CR

Accountreceivableaccount XXX(torecord thecashreceived for the baddebtrecovered)

DR Baddebtrecovered XXX

CR Profitandlossaccount XXX

(torecord therevenue from baddebtrecovered in the profitand loss

Account/incomestatement)


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Bad Debts Recovered

OR

DR Cash account XXX

CR Bad debts recovered XXX

(torecord thecashreceived for the baddebtrecovered)

DR Bad debt recovered XXX

CR Profit and loss account XXX

(torecord therevenue from baddebtrecovered in the profitand loss

Account/incomestatement)


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Bad Debts Recovered- example

A debtor, Chong, whose account had been written offas bad paid RM700 by cheque to settle the amountowing by him on 1 November 2009. The accountingperiod ends 31 December 2009.


1. The journal entries to record the above transactions

2. The relevant ledger accounts

3. An extract income statement

4. An extract balance sheet


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Doubtful Debts Expenseand Allowance for

doubtfuldebts (Provision fordoubtfuldebts)

Allowance fordoubtfuldebt= % x Total accounts receivable(after bad debts)

Note:

In the first accountingperiod, the doubtful debt estimatedwill be recorded in full. In the next accountingand thefollowingaccountingperiod, record only increase or decreasein the estimation (provision doubtful debts)


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doubtfuldebts (Provision fordoubtfuldebts) Journalentries

At theendof the firstyear:

DR Doubtful debt XXX

CR

Allowance for doubtful debt XXX( to create an allowance for doubtful debts)

DR Income Statement XXX

CR Doubtful debt XXX

( to transfer doubtful debts to income statement)

Note:

The balance in the allowance for doubtful debt is deductfrom total debtors in the balance sheet


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doubtfuldebts (Provision fordoubtfuldebts) Ledgerentries

Accounts:

Income Statement:

Balance Sheet:


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doubtfuldebts (Provision fordoubtfuldebts) Notes

The purpose of the credit to the allowance of doubtful debtaccount is to create a contra account to the debtors accountand therefore is also considered a negative asset account tothe debtors account.

The purpose of the allowance of doubtful debt account is toreduce the debtors account to a more correct amount so thatthe debtors figure used in the balance sheet better reflectsthe financial position of the business and this will represents

the amount of debtors (net debtors) that is most likely to becollected.


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doubtfuldebts (Provision fordoubtfuldebts) Example for firstyear

At 31st December 2007, the debtors figure amounted toRM20,000. it is estimated that 4% will prove to be bad debtsand it is decided to make a provision for these.

Youarerequired to prepare:1. The journal entries to record the above transactions2. The relevant ledger accounts3. An extract income statement4. An extract balance sheet


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doubtfuldebts (Provision fordoubtfuldebts)


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Doubtful Debts Expenseand Allowanceof doubtful

debts (Provision fordoubtfuldebts) Journalentries for thefollowing year

Increase inallowanceof doubtfuldebt

DRDoubtful debt XXX

CR Allowance for doubtful debt XXX

(Torecordan increase indoubtfuldebt (opening balance closing balance)

DRDoubtful debt XXXCR Income statement XXX(To transfer thedoubtfuldebt to incomestatementat theend

of theyear)

Note:Decrease in allowance of doubtful debt revenue to the business)


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Doubtful Debts Expenseand Allowanceof doubtful

debts (Provision fordoubtfuldebts) Exampleof increaseanddecrease inallowanceof doubtfuldebt

At 31st December 2007, the debtors figure amounted toRM20,000. it is estimated that 4% will prove to be bad debts andit is decided to make a provision for these. At 31st December2008, the debtors had risen to RM25,000 and at 31st December2009, the debtors figure had fallen to RM18,000.

Youarerequired to prepare for theyearended 2007, 2008and 20091. The journal entries to record the above transactions2. The relevant ledger accounts3. An extract income statement4. An extract balance sheet


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Discount Allowed and discount

received

Discountallowed:

Discount given by a seller.

Discountreceived:

Discount given to the buyer.


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Discount Allowed and discount

received

Example:

On 1st January 2009, Anis owed the businessRM1,000. On the same date the firm owed Anas

RM400. The firm received a cheque from Anis on 6thJanuary and agreed to give her 5% discount. On 7January 2009, the firm paid cash to Anas and wasallowed a 2% discount.

Youarerequired torecord theabove transactionsin theappropriateaccounts.


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Allowance For Discount Allowable

A business will try to recognise all possible lossesbut will not recognise profit until it is earned.

Therefore the business may want to estimate theamount of discount that may be allowed tocustomers who pay within the discount period. Thisis known as discount allowable.


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Allowance For Discount Allowable

Allowance fordiscountallowable:

% x (Total accounts receivable (after bad debt) allowance fordoubtful debts

In the first accounting period, discounts allowable will berecorded in full.

In the next accounting period and the following period, recordthe increase or decrease in the estimation.


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Discount Allowable and Allowance

For Discount Allowable

Journalentries: At theendof the firstyear

( to create an allowance for discount allowable)

DR Discount allowable XXXCR Allowable for discount allowable XXX

To close off discount allowable to the income statement at the endof the year:

DR Income Statement XXXCR Discount Allowable XXX

Note:The balance in the allowance for discount allowable is deduct from

total debtors in the balance sheet


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Discount Allowable and Allowance For

Discount Allowable example for the first year

At 31st December 2007, the debtors figure amounted to RM20,000.it is estimated that 4% will prove to be bad debts and it is decidedto make a provision for these. In addition, the business estimatethe allowance for discount allowable at the end of the accounting

period to be 1% from the remaining accounts receivable for theyear ended 2007.


1. The journal entries to record the above transactions2. The relevant ledger accounts3. An extract income statement4. An extract balance sheet


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Discount Allowable Journal entries for the followingyear

Decrease inallowanceof discountallowable

DR Allowance of Discount allowable XXXCR Discount allowable XXX

(Torecordan increase indiscountallowable (opening balance> closing balance)

DR Discount allowable XXXCR Income statement XXX(To transfer thediscountallowable to incomestatementat

theendof theyear)

Note:Decrease in allowance of discount allowable revenue to thebusiness)


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Discount Allowable Example ofincrease anddecrease in allowance for discount allowable

At 31st December 2007, the debtors figure amounted toRM20,000. it is estimated that 4% will prove to be bad debts andit is decided to make a provision for these. At 31st December2008, the debtors had risen to RM25,000 and at 31st December

2009, the debtors figure had fallen to RM18,000. In addition, thebusiness estimate the allowance for discount allowable at the end ofthe accounting period to be 1% from the remaining accountsreceivable for the year 2007, 2008 and 2009

Youarerequired to prepare for theyearended 2007, 2008and 20091. The journal entries to record the above transactions2. The relevant ledger accounts3. An extract income statement4. An extract balance sheet

acc 106 account receivables

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