©coursecollege.com 1 10 receivables learning objectives 1.utilize the direct method for...
TRANSCRIPT
©CourseCollege.com
1
10 Receivables
Learning Objectives1. Utilize the Direct Method for
Uncollectible Accounts Receivable
2. Utilize the Allowance Method for Uncollectible Accounts Receivable
3. Compute the Uncollectible Accounts Receivable Allowance
4. Describe accounting for Notes Receivable
5. Analysis: Compute and explain days’ sales and turnover in accounts receivable
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Examples are
Accounts and Notes Receivable
©CourseCollege.com
2
Overview -Receivables
Receivables -assets expected to be converted to cash over time. •Accounts receivable - amounts due from customer purchases “on account” in the normal course of business•Notes receivable - written promises to pay including interest.
Receivables -assets expected to be converted to cash over time. •Accounts receivable - amounts due from customer purchases “on account” in the normal course of business•Notes receivable - written promises to pay including interest.
©CourseCollege.com
3
Overview -Receivables
Accounts receivable are a primary source of operating cash flow. To increase cash flow receivables are often:•Factored or sold to third parties for cash (less a factoring charge) to provide needed cash flow prior to the receivables scheduled collection. •Pledged or offered as collateral to third party providers of business credit (i.e. banks) to facilitate lines of credit and loans to the firm.
Accounts receivable are a primary source of operating cash flow. To increase cash flow receivables are often:•Factored or sold to third parties for cash (less a factoring charge) to provide needed cash flow prior to the receivables scheduled collection. •Pledged or offered as collateral to third party providers of business credit (i.e. banks) to facilitate lines of credit and loans to the firm.
©CourseCollege.com
4
Overview -Receivables
A major issue in the study of accounts receivable is
the accounting problem of dealing with credit losses
due to uncollectible accounts.
A major issue in the study of accounts receivable is
the accounting problem of dealing with credit losses
due to uncollectible accounts.
©CourseCollege.com
5
Overview -Receivables
Two methods are used to deal with uncollectible*
accounts:•Direct Write Off
•Allowance •*also described as doubtful
Two methods are used to deal with uncollectible*
accounts:•Direct Write Off
•Allowance •*also described as doubtful
Additional Concepts are needed to understand the treatment of Receivables
©CourseCollege.com
6
Materiality Concept
Will the size of the accounting information misstatement or omission affect the judgment
of third parties who are relying on the statements?
Will the size of the accounting information misstatement or omission affect the judgment
of third parties who are relying on the statements?
©CourseCollege.com
7
Materiality ConceptExample: A business typically records office supplies expense in range of $50,000 per year. The physical count at year end includes a box of paper clips, for which, there is no available record of cost. Using one comparable brand, the cost is $5.25; using a second comparable brand the cost is $6.25. In a $50,000 budget, the $1 of uncertainty is not material. Either figure would be acceptable.
Example: A business typically records office supplies expense in range of $50,000 per year. The physical count at year end includes a box of paper clips, for which, there is no available record of cost. Using one comparable brand, the cost is $5.25; using a second comparable brand the cost is $6.25. In a $50,000 budget, the $1 of uncertainty is not material. Either figure would be acceptable.
©CourseCollege.com
8
Conservatism Concept
The desired practice in accounting of using the least optimistic estimate when two or more estimates are equally
likely.
The desired practice in accounting of using the least optimistic estimate when two or more estimates are equally
likely.
©CourseCollege.com
9
Conservatism Concept
Example: One trade publication estimates the useful life of fabricated concrete forms to be 50 pours, while another estimates 35 pours. The conservatism concept would encourage use of the 35 pour estimate to determine the useful life as it is the least optimistic information as to the life of this material.
Example: One trade publication estimates the useful life of fabricated concrete forms to be 50 pours, while another estimates 35 pours. The conservatism concept would encourage use of the 35 pour estimate to determine the useful life as it is the least optimistic information as to the life of this material.
©CourseCollege.com
10
Materiality & Conservatism
Accounting for Accounts Receivable involves the use of estimates.
When using estimates it is important to remember these concepts.
Use the least optimistic estimate when alternatives are equally likely.
Omission of an item in an estimate is acceptable if it’s omission would not affect the judgment of third party users of the financial statements.
©CourseCollege.com
11
Uncollectible accounts result in Bad Debt*
ExpenseAn inescapable fact of granting
credit to customers in the course of business is the hard
reality that some customers will eventually be unable or
unwilling to pay.
An inescapable fact of granting credit to customers in the
course of business is the hard reality that some customers will
eventually be unable or unwilling to pay.
* Also called Uncollectible Account expense
©CourseCollege.com
12
O10.1
Objective 10.1: Utilize the Direct Method for Uncollectible
Accounts Receivable
With the Direct Method, the account is expensed (written off) only when it is
deemed to be uncollectible.
With the Direct Method, the account is expensed (written off) only when it is
deemed to be uncollectible.
Example: On January 18, Wilson Excavators determined that the entire account receivable of $6,750 owed by customer Oakwood Homes was not collectible due to a bankruptcy. The journal entry to record the write off follows. . .
Example: On January 18, Wilson Excavators determined that the entire account receivable of $6,750 owed by customer Oakwood Homes was not collectible due to a bankruptcy. The journal entry to record the write off follows. . .
©CourseCollege.com
13
Uncollectible account expense is also know as
Bad debt expense.
Debit Credit
2007 Balance Forward 560.00
18-Jan J7 6,750.00 7,310.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Journal entry –Direct write
off
Debit Credit
2007 Balance Forward 6,750.00
18-Jan J7 6,750.00 0.00
SUBSIDIARY LEDGER
Account Name: Oakwook Homes, RECEIVABLE Acct #: 150.7
Date ItemPost Ref. Debit Credit
BALANCE
Page 7
Date Description PR Debit Credit
18-Jan Uncollectible Account Expense 520 6,750.00
Oakwood Homes, RECEIVABLE /150 6,750.00
GENERAL JOURNAL
©CourseCollege.com
14
When was the $6,750 earned?
The Oakwood Homes receivable was earned two months earlier in the previous fiscal year.
Therefore, the Uncollectible account expense will not occur in the same fiscal period as the revenue from this transaction. This violates the Matching Concept.
©CourseCollege.com
15
Direct Write Off Method
Because it violates the Matching Concept, the Direct write off Method is not a generally accepted accounting principle. It is the method permitted by the Internal Revenue Service
©CourseCollege.com
16
O10.2
The Allowance method estimates
Uncollectible accounts expense
to follow the Matching Concept.
Objective 10.2: Utilize the Allowance method for Uncollectible Accounts
Receivable
©CourseCollege.com
17
O10.2
The Allowance account is:
•A contra asset account
•Used to reduce Accounts Receivable by the estimate of future uncollectible accounts.
We don’t know which Accounts Receivable will become
uncollectible, so we use a contra account.
©CourseCollege.com
18
Allowance for Uncollectible Accounts
(1)
Net realizable value 6
The net effect or “weight”
on the balance sheet is
called the net
realizable value of
accounts receivable.
Accounts Receivable 7
O10.2
The Allowance account
©CourseCollege.com
19
Adjusting entry for AR Allowance
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 2,500.00
Allowance for Uncollectible Accounts 155 2,500.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,500.00 2,500.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,500.00 2,500.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O10.2
©CourseCollege.com
20
When is a specific AR removed because it cannot
be collected?
When the firm receives information that the specific AR
will not be collected.It is then written off
O10.2
©CourseCollege.com
21
O10.2
The Dog here just informed me that
he is bankrupt and can’t pay his
$1000 espresso bill.
Don’t you have something in
your Allowance account for my
unfortunate circumstance?
©CourseCollege.com
22
Write off using the Allowance method
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,500.00 2,500.00
25-Mar J9 1,000.00 1,500.00
LEDGER
Account Name:ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 1,000.00
25-Mar J9 1,000.00 0.00
LEDGER
Account Name: Mr. Dog, RECEIVABLE Acct #: 150.7
Date ItemPost Ref. Debit Credit
BALANCE
Page 9
Date Description PR Debit Credit
25-Mar Allowance for Uncollectible Accounts 155 1000.00
Mr. Dog -RECEIVABLE /150 1,000.00
GENERAL JOURNAL
Notice the Allowance is being used up with the Write off.
O10.2
©CourseCollege.com
23
Write offs using the Allowance method do not involve an expense
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,500.00 2,500.00
25-Mar J9 1,000.00 1,500.00
LEDGER
Account Name:ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 1,000.00
25-Mar J9 1,000.00 0.00
LEDGER
Account Name: Mr. Dog, RECEIVABLE Acct #: 150.7
Date ItemPost Ref. Debit Credit
BALANCE
Page 9
Date Description PR Debit Credit
25-Mar Allowance for Uncollectible Accounts 155 1000.00
Mr. Dog -RECEIVABLE /150 1,000.00
GENERAL JOURNAL
The expense
was recorded when the allowance
was adjusted
O10.2
©CourseCollege.com
24
O10.2
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 2,500.00
Allowance for Uncollectible Accounts 155 2,500.00
GENERAL JOURNAL
Page 9
Date Description PR Debit Credit
25-Mar Allowance for Uncollectible Accounts 155 1000.00
Mr. Dog -RECEIVABLE /150 1,000.00
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Adjust – Write
off The specific accounts which will eventually be
uncollectible are not know when the estimate is
made. It is a best guess.
©CourseCollege.com
25
O10.3
Objective 10.3: Compute the Uncollectible Accounts
Receivable Allowance
©CourseCollege.com
26
How is Uncollectible account expense estimated?
• Using the firm’s historical expense information
•Two approaches are used. . .
O10.3
How is the amount of the Allowance estimated?
©CourseCollege.com
27
1. Balance Sheet Focus
2. Income Statement Focus
At the end of the fiscal period, both approaches estimate and record the
expense for uncollectible accounts.
Two Approaches
O10.3
©CourseCollege.com
28
1. Balance Sheet Focus –What portion of the existing Accounts Receivable are estimated to be uncollectible?
2. Income Statement Focus-What portion of Sales on account are estimated to be uncollectible?
O10.3
Two Approaches
©CourseCollege.com
29
1. Balance Sheet Focus –net realizable value is the greater concern
2. Income Statement Focus-matching concept is the greater concern
O10.3
Which approach should be used?
©CourseCollege.com
30
% of Accounts Receivable
Firms using the % of Accounts Receivable believe that a
percentage of AR is the best estimate of uncollectible account
expense.Based on historical uncollectible account expense, the firm
determines the percentage of end of fiscal period Accounts Receivable
that are expected to result in uncollectible account (bad debt)
expense.
Based on historical uncollectible account expense, the firm
determines the percentage of end of fiscal period Accounts Receivable
that are expected to result in uncollectible account (bad debt)
expense.O10.3
©CourseCollege.com
31
% of Accounts Receivable(example)
Marsh Cabinets estimates that 2.5% of the end of period AR result in uncollectible account expense. AR at year end total $88,000.
Marsh will select the adjusting entry for Uncollectible account expense that results in the net realizable value of AR equal to $88,000 less 2.5% as follows. . .
O10.3
$88,000 X .025 = $2,200$88,000 X .025 = $2,200
©CourseCollege.com
32
% of Accounts Receivable(example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 2,200.00
Allowance for Uncollectible Accounts 155 2,200.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,200.00 2,200.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,200.00 2,200.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O10.3
©CourseCollege.com
33
% of Accounts Receivable(example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 2,200.00
Allowance for Uncollectible Accounts 155 2,200.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,200.00 2,200.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 2,200.00 2,200.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
What if there had
been a balance in
the Allowance account?
O10.3
©CourseCollege.com
34
% of Accounts Receivable(example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520
Allowance for Uncollectible Accounts 155
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 400.00
31-Dec J7
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
With the % of AR
method the
balance (if any) in the Allowance account must be
considered when
calculating the
adjusting entry .
O10.3
©CourseCollege.com
35
% of Accounts Receivable(example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 1,800.00
Allowance for Uncollectible Accounts 155 1,800.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 1,800.00 1,800.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 400.00
31-Dec J7 1,800.00 2,200.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
The adjusting entry is
calculated to force
the ending balance to equal the % of AR desired.
O10.3
©CourseCollege.com
36
% of Accounts Receivable(example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 1,800.00
Allowance for Uncollectible Accounts 155 1,800.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 1,800.00 1,800.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 400.00
31-Dec J7 1,800.00 2,200.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
This would result in a different
amount of Uncollectible account expense.
O10.3
©CourseCollege.com
37
Aging Accounts Receivable
A more accurate % of AR approach is to employ an aging analysis of AR.
Aging analysis separates AR into groups according to their due date.
Typically, the older the group of AR, the higher the % expected to become uncollectible.
Using historical experience, the firm applies different percentages to the aging groups as follows. . .
O10.3
©CourseCollege.com
38
Aging Accounts Receivable
Days past due AR Balance Percent Uncollectible
Amount Uncollectible
Current 67,500 0.8% 5400 to 30 days 34,500 2.1% 72531 to 60 days 19,300 6.7% 1,29361 to 90 days 5,600 17.0% 95291 days and over 11,200 34.2% 3,830
138,100 7,340
Milton Art SupplyAR Aging 12/31/07
Days past due AR Balance Percent Uncollectible
Amount Uncollectible
Current 67,500 0.8% 5400 to 30 days 34,500 2.1% 72531 to 60 days 19,300 6.7% 1,29361 to 90 days 5,600 17.0% 95291 days and over 11,200 34.2% 3,830
138,100 7,340
Milton Art SupplyAR Aging 12/31/07
O10.3
After adjusting entry, this should be the balance in the Allowance
account
©CourseCollege.com
39
Allowance for Uncollectible Accounts (7,340)
Net realizable value 130,760
Accounts Receivable 138,100
O10.3
Net value of AR
©CourseCollege.com
40
% of Sales (on account)
Firms using the % of Sales believe that some percentage of credit Sales is the best estimate of uncollectible
account expense.
Based on historical uncollectible account expense, the firm
determines the percentage of total credit sales that are expected to
result in uncollectible account (bad debt) expense.
Based on historical uncollectible account expense, the firm
determines the percentage of total credit sales that are expected to
result in uncollectible account (bad debt) expense.
O10.3
©CourseCollege.com
41
% of Sales (example)
Lie Photography estimates that 1.2% of sales on account have resulted in uncollectible account expense. For the year just ended, total sales on account were $365,000.
O10.3
Lie will expense 1.2% of sales or $4,380 with an adjusting entry at year end as follows. . .
$365,000 X .012 = $4,380$365,000 X .012 = $4,380
©CourseCollege.com
42
% of Sales (example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 4,380.00
Allowance for Uncollectible Accounts 155 4,380.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 4,380.00 4,380.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 150.00
31-Dec J7 4,380.00 4,530.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O10.3
©CourseCollege.com
43
% of Sales (example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 4,380.00
Allowance for Uncollectible Accounts 155 4,380.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 4,380.00 4,380.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 150.00
31-Dec J7 4,380.00 4,530.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
O10.3
Any balance remaining in
the Allowance account is
ignored when using
the % of Sales
method.
©CourseCollege.com
44
% of Sales (example)
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Uncollectible Account Expense 520 4,380.00
Allowance for Uncollectible Accounts 155 4,380.00
GENERAL JOURNAL
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 4,380.00 4,380.00
LEDGER
Account Name: UNCOLLECTIBLE ACCOUNT EXPENSE Acct #: 520
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 150.00
31-Dec J7 4,380.00 4,530.00
LEDGER
Account Name: ALLOWANCE FOR UNCOLLECTIBLE ACCT Acct #: 155
Date ItemPost Ref. Debit Credit
BALANCE
O10.3
Over several fiscal
periods, a build up or shortage in
the Allowance account
should be addressed
by reviewing
the estimate
used.
©CourseCollege.com
45
Objective 10.4: Describe accounting for Notes
Receivable
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
O10.4
©CourseCollege.com
46
Promissory Note$5,000 May 14, 2007Amount Date
Sixty days after date I promise to pay to the order of
Western SupplySeattle, WA
Five Thousand and no/100 ————————————-DollarsFor value received with interest at the annual rate of 10%
John Kowalsky .Kowalsky Construction
Promissory Note$5,000 May 14, 2007Amount Date
Sixty days after date I promise to pay to the order of
Western SupplySeattle, WA
Five Thousand and no/100 ————————————-DollarsFor value received with interest at the annual rate of 10%
John Kowalsky .Kowalsky Construction
Notes Receivable
The Maker is the entity who
promises to pay.O10.4
©CourseCollege.com
47
Page 4
Date Description PR Debit Credit
28-Jul Notes Receivable 170 5,000.00
Customer A, RECEIVABLE /150 5,000.00
GENERAL JOURNAL
Page 4
Date Description PR Debit Credit
28-Jul Notes Receivable 170 5,000.00
Cash 100 5,000.00
GENERAL JOURNAL
Conversion of Accounts
Receivable
Conversion of Accounts
Receivable
Financing a Sale
Financing a Sale
Lending Cash directly
Lending Cash directly
Debit Credit
2007 Balance Forward 5,000.00
28-Jul J4 5,000.00 0.00
SUBSIDIARY LEDGER
Account Name:Customer A, RECEIVABLE Acct #: 150.3
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 0.00
28-Jul J4 5,000.00 5,000.00
LEDGER
Account Name: NOTES RECEIVABLE Acct #: 170
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Notes Receivabl
e
Page 4
Date Description PR Debit Credit
28-Jul Notes Receivable 170 5,000.00
Sales 400 5,000.00
GENERAL JOURNAL
Examples
O10.4
©CourseCollege.com
48
Principal amount
Annual Interest
rate
Time Period
in yearsInterestX X =
Example: Principal = $50,000; Interest (annual) 8%; Maturity 180 days;
The note was received Feb. 1; end of fiscal period Dec. 31, no adjusting entry is required.
Notes Receivable
$50,000 x .08 x (180/360) = $2000
O10.4
©CourseCollege.com
49
Debit Credit
2007 Balance Forward 50,000.00
1-Aug J7 50,000.00 0.00
LEDGER
Account Name: NOTES RECEIVABLE Acct #: 170
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 500.00
1-Aug J7 2,000.00 2,500.00
LEDGER
Account Name: INTEREST INCOME Acct #: 415
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 8,600.00
1-Aug J7 52,000.00 60,600.00
LEDGER
Account Name: CASH Acct #: 100
Date ItemPost Ref. Debit Credit
BALANCE
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 7
Date Description PR Debit Credit
1-Jul Cash 100 52,000.00
Notes Receivable 170 50,000.00
Interest Income 415 2,000.00
GENERAL JOURNAL
O10.4
At Maturit
y
Remember that Interest Income is
usually reported on the Income
Statement with “Other (Income)/
Expense”
©CourseCollege.com
50
Principal amount
Annual Interest
rate
Time Period
in yearsInterestX X =
Example: Principal = $24,000; Interest (annual) 10%; Maturity 90 days;
The note was received Nov. 1; end of fiscal period Dec. 31 adjustment entry is required.
Notes Receivable
$24,000 x .10 x (60/360) = $400
O10.4
©CourseCollege.com
51
Debit Credit
2007 Balance Forward 234.50
31-Dec J7 400.00 634.50
LEDGER
Account Name: INTEREST INCOME Acct #: 415
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2007 Balance Forward 0.00
31-Dec J7 400.00 400.00
LEDGER
Account Name: INTEREST RECEIVABLE Acct #: 160
Date ItemPost Ref. Debit Credit
BALANCE
Adjusting Entry
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Page 7
Date Description PR Debit Credit
31-Dec ADJUSTING ENTRIES
Interest Receivable 160 400.00
Interest Income 415 400.00
GENERAL JOURNAL
O10.4
©CourseCollege.com
52
Debit Credit
2008 Balance Forward 0.00
1-Feb J7 200.00 200.00
LEDGER
Account Name:INTEREST INCOME Acct #: 415
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2008 Balance Forward 24,000.00
1-Feb J7 24,000.00 0.00
LEDGER
Account Name:NOTES RECEIVABLE Acct #: 170
Date ItemPost Ref. Debit Credit
BALANCE
Page 7
Date Description PR Debit Credit
1-Feb Cash 100 24,600.00
Interest Receivable 160 400.00
Interest Income 415 200.00
Note Receivable 170 24,000.00
GENERAL JOURNAL
Debit Credit
2008 Balance Forward 400.00
1-Feb J7 400.00 0.00
LEDGER
Account Name: INTEREST RECEIVABLE Acct #: 160
Date ItemPost Ref. Debit Credit
BALANCE
Debit Credit
2008 Balance Forward 28,500.00
1-Feb J7 24,600.00 53,100.00
LEDGER
Account Name:CASH Acct #: 100
Date ItemPost Ref. Debit Credit
BALANCE
At Maturit
yThe receipt of
principal and interest at maturity requires
this journal entry that recognizes the new
interest income for the current fiscal period.
O10.4
©CourseCollege.com
53
Objective 10.5: Analysis: Compute and explain
days’ sales and turnover in accounts
receivable
O10.5
©CourseCollege.com
54
The days’ sales uncollected answers the following question:On average, how many days will it take to collect the current AR total?
Days’ Sales Uncollected
AR
Sales
Days’ Sales
Uncollected
O10.5
The AR balance is the end of year
total. Sales is for the
year.
X 365
©CourseCollege.com
55
The AR turnover ratio answers the following question:
How many times did the firm sell its’ average Accounts Receivable.
AR Turnover
SalesAR
Turnover
O6.4
Average AR is often calculated
as:(Beg AR +End
AR)/2
Average Accounts Receivable
©CourseCollege.com
56
Assets 2007 2008 Liabilities 2007 2008 Cash 9,000 10,000 Accounts Payable 45,000 41,500 Accounts receivable 75,000 81,000 Inv. Loan 18,000 14,400 Alllowance for Uncol. Accounts (2,500) (2,600) Total liabilities 63,000 55,900
Inventory 151,000 164,000 Equity Total assets 232,500 252,400 Owner, Capital 169,500 196,500
Sales 654,000
Cost of Goods Sold 490,500 Average AR 75,450Wages expense 61,000 (net AR for years 2007 +2008) / 2Uncollectible account AR turnover 8.7 expense 2,000 (Sales / Avg. AR)Miscellaneous expense 73,500 Days' Sales Uncollected 43.8
Net Profit 27,000 (365 x AR / Sales)
Income StatementFor the year ended 12/31/08
days
X
Balance Sheet -April's GiftsAs of 12/31 2007 and 2008
Example
©CourseCollege.com
57
End Unit 10