Accounting for Receivables

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Unit
8
ACCOUNTING FOR RECEIVABLES
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RECEIVABLES

• The term receivables refers to amounts due from
  individuals and other companies they are claims
  expected to be collected in cash.
• Three major classes of receivables are
• 1. Accounts Receivable
• 2. Notes Receivable
• 3. Other Receivables

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ACCOUNTS RECEIVABLE

• The three primary accounting problems associated
  with accounts receivable are
• 1. Recognizing accounts receivable.
• 2. Valuing accounts receivable.
• 3. Disposing of accounts receivable.

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RECOGNIZING ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Accounts Receivable - Adorable Junior
Sales
When a business sells merchandise to a customer
on credit, Accounts Receivable is debited and
Sales is credited.
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RECOGNIZING ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
100
July 5
Sales Returns and Allowances
100
Accounts Receivable - Adorable
To record merchandise returned.
When a business receives returned merchandise
previously sold to a customer on credit, Sales
Returns and Allowances is debited and Accounts
Receivable is credited.
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RECOGNIZING ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
900
July 31
Cash (1,000 - 100)
900
Accounts Receivable - Adorable
To record collection of account.
When a business collects cash from a customer for
merchandise previously sold on credit, Cash is
debited and Accounts Receivable is credited.
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RECOGNIZING ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
13.50
July 31
Accounts Receivable - Adorable
13.50
Interest Revenue
To record interest on amount due.
When financing charges are added to a balance
owing, Accounts Receivable is debited and
Interest Revenue is credited.
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VALUING ACCOUNTS
RECEIVABLE

• To ensure that receivables are not overstated on
  the balance sheet, they are stated at their net
  realizable value.
• Net realizable value is the net amount expected
  to be received in cash and excludes amounts that
  the company estimates it will not be able to
  collect.

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VALUING ACCOUNTS RECEIVABLE

• Two methods of accounting for uncollectible
  accounts are
• 
  1. Allowance method
• 
  2. Direct write-off
  method

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DIRECT WRITE-OFF METHOD

• Under the direct write-off method, no entries are
  made for bad debts until an account is determined
  to be uncollectible at which time the loss is
  charged to Bad Debts Expense.
• No attempt is made to match bad debts to sales
  revenues or to show the net realizable value of
  accounts receivable on the balance sheet.

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DIRECT WRITE-OFF METHOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 200
  
  
  
  
  200

Jan. 12
Bad Debts Expense
Accounts Receivable E. Schaefer
For write-off of E. Schaefer account.
Periera Company writes off E. Schaefers 200
balance as uncollectible on January 12. When
this method is used, Bad Debts Expense will show
only actual losses from uncollectibles.
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THE ALLOWANCE METHOD

• The allowance method is required when bad debts
  are deemed to be material in amount.
• Uncollectible accounts are estimated and the
  expense for the uncollectible accounts is matched
  against sales in the same accounting period in
  which the sales occurred.

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THE ALLOWANCE METHOD
Estimated uncollectible amounts are debited to
Bad Debts Expense and credited to Allowance for
Doubtful Accounts (a contra asset account) at the
end of each period. This journal entry is
considered an adjusting entry
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ADORABLE JUNIOR GARMET Balance Sheet (partial)

• Current assets
• Cash 14,800
• Accounts receivable 200,000
• Less Allowance for doubtful accounts
  24,000 188,000

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THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 500
  
  
  
  
  500

Mar. 1
Allowance for Doubtful Accounts
Accounts Receivable Nadeau
Write-off of Nadeau account.
Actual uncollectible accounts are debited to
Allowance for Doubtful Accounts and credited to
Accounts Receivable at the time the specific
account is written off.
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THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 500
  
  
  
  
  500

July 1
Accounts Receivable Nadeau
Allowance for Doubtful Accounts
To reverse write-off of Nadeau
account.
When there is recovery of an account that has
been written off 1. reverse the entry made to
write off the account and ...
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THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 500
  
  
  
  
  500

July 1
Cash
Accounts Receivable Nadeau
To record collection from Nadeau.
2. Record the collection in the usual manner.
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SUMMARY OF TYPICAL JOURNAL ENTRIES RELATED TO
RECEIVABLES ALLOWANCE METHOD