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## Accounting for Receivables

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### CHAPTER 8 ACCOUNTING FOR RECEIVABLES Monday, Dec 1 will be Unit 3 Test (covering chapter 7 and 8) – PowerPoint PPT presentation

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Title: Accounting for Receivables

1
CHAPTER
8
ACCOUNTING FOR RECEIVABLES Monday, Dec 1 will be
Unit 3 Test (covering chapter 7 and 8)
2
VALUING ACCOUNTS RECEIVABLE
• Two methods of accounting for uncollectible
accounts are

• 1. Allowance method

• 2. Direct write-off
method

3
BASES USED FOR THE ALLOWANCE METHOD
• Companies use either of two methods in the
estimation of uncollectible accounts
• 1. Percentage of sales
• 2. Percentage of receivables
• Both bases are GAAP the choice is a management
decision.

4
PERCENTAGE OF RECEIVABLES BASIS
• Under this approach, you always subtract the
beginning balance of the Allowance for DA from
the estimated number.
• For example, The CKs AR is 240,000 and they
estimate that 10 will be uncollectible in the
future. Then they should muliply 0.1 240,000
24000 (ending balance must be 24000)
• But they realized that beginning balance of
Allowance for DA is 1000 then the difference is
23000.

5
ILLUSTRATION 9-4
COMPARISON OF BASES OF ESTIMATING UNCOLLECTIBLES
Percentage of Sales
Percentage of Receivables
Net Realizable Value
Allowance
Accounts
for
Receivable
Doubtful
Accounts
• Emphasis on Income Statement Relationships

Emphasis on Balance Sheet Relationships
6
Collection Process
• Companies use various methods for collecting past
due accounts including letters, calls, and legal
actions.
• Some companies hire collection agency to collect.
• When everything was tried and it still seems
impossible to collect then the account should be
written off.
• Again, Internal control Purpose Only manager
should authorize write off, otherwise, employees
can steal companys cash.

7
Collection Process
• March 1 Allowance for DA 4500
• AR Kids online 4500
• Writing off AR Kids online
• We do not increase bad debt expense, but we
increase ADA account and decrease AR.

8
NON-BANK CARD SALES
• Sales using American Express and other non-bank
cards are reported as credit sales, (debit AR)
not cash sales.
• Conversion into cash does not occur until
American Express remits the net amount
to the seller.

9
NON-BANK CARD SALES
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
• 475

25

500

July 31
Accounts Receivable
Credit Card Expense (500 x 5)
Sales
To record American Express
credit card sales.
Kerr Music Co. accepts an AMERICAN EXPRESS card
for a 500 sale. The service fee that AMERICAN
EXPRESS charges is 5 percent.
10
NOTES RECEIVABLE
• A promissory note is a written promise to pay a
specified amount of money on demand (or at a
definite time.)
• Promissory note is used
• When individuals (or companies) lend or borrow
money.
• When the amount of the transaction and the credit
period are long term or
• In settlement of accounts receivable

11
NOTES RECEIVABLE
• The party making the promise is the
maker.(borrower)
• The party to whom payment is made is
called the payee. (lender)
• The same promissory note is a note payable for
maker and it is a note receivable for the payee.

12
NOTES RECEIVABLE
• The promissory note gives these details
• Name of the maker and payee
• Amount of the loan
• Loan period (such as 1 year or 5 years)
• Interest rate (such as 8)
• How interest will be paid Whether interest is
repayable monthly or fully paid at maturity along
with the principal
• Whether any security is pledged as collateral for
the loan and what happens if the maker defaults.

13
Difference between NOTES RECEIVABLE and AR
• AR is informal promise to pay, whereas NR is more
formal written promise.
• The lender has stronger legal claim under NR.
• NR is a negotiable instrument, which means it can
be sold or transferred to another person or
company by endorsement.
• AR results from a credit sale transaction whereas
NR results from financing a purchase (such as
when buying a car), lending money, or extending
AR for a longer period.

14
Difference between NOTES RECEIVABLE and AR
• AR is usually due in a short period of time (e.g.
30 days) while a note can extend for longer
periods of time.
• AR does not normally incur interest expense
(unless the account is overdue.)
• A NR usually bears interest for the entire
period.

15
Similarities of NOTES RECEIVABLE and AR
• Both are credit instruments.
• Both are valued at their net realizable values.
• Both can be sold to another party.
• The basic issues in accounting for notes
receivable are the same as those for AR as
follows
• Recognizing NR
• Disposing NR

16
ILLUSTRATION 9-8 FORMULA
FOR CALCULATING INTEREST
The basic formula for calculating interest on an
interest-bearing note is

The interest rate specified on
the note is an annual rate of
interest. For example 1000 0.06 6/12 30
for 6 months
17
RECOGNIZING NOTES RECEIVABLE
• 1,000

1,000

Wilma Company receives a 1,000, 6 promissory
note, due in two months (July 31) from Brent
Company to settle an open account. (Brant bought
merchandise on account on March 15. Brant did
not pay in 30 days, but they will pay in the
future. )
18
HONOUR OF NOTES RECEIVABLE
• A note is honoured when it is paid in full at its
maturity date.
• Wolder Co. lends Higly Inc. 10,000 on June 1,
accepting a 4.5 interest-bearing note, due in 4
months, on September 30.
• Wolder collects the maturity value of the note
from Higley on September 30.

19
• If the year end was July 31, and the note
receivable from previous example was still
outstanding, then they should make the following
adjusting entry to honor matching principle.
• Two months have passed from the issue date, so we
must recognize two months of accrued interest.
• 0.045 2/12 10,000 75
• July 31 Interest Receivable 75
• Interest Revenue 75
• Sep 30 Cash 10150
• Interest Receivable 75
• Notes Receivable 10000
• Interest Revenue 75

20
VALUING NOTES RECEIVABLE
• Like accounts receivable, short-term notes
receivable are reported at their net realizable
value. (you must estimate how much of it will
actually be collected)
• The notes receivable allowance account is
Allowance for Doubtful Notes. (or

21
Classwork / Homework
• P438 E8.7, E8.8
• P443 P8.8

22
DISHONOUR OF NOTES RECEIVABLE
• A dishonoured note is a note that is not paid in
full at maturity.
• A dishonoured note receivable is no longer
negotiable.
• Since the payee still has a claim against the
maker of the note, the balance in Notes
Receivable is usually transferred to Accounts

23
RECOGNIZING NOTES RECEIVABLE
• 1,000

1,000
• If a note is made to get cash, then the entry is
a debit to Notes Receivable and credit to Cash.
(For borrower)
• Company receives a 1,000, 6 promissory note,
due in two months (July 31) from Brent Company.
• Interest will be recorded later when it is paid.