Receivables docx

Receivables
Chapter
9

Accounts receivable
Receivables
Notes receivable

Design internal controls
for receivables.
Objective 1

Establishing Internal Control
✔
What are some controls over accounts receivable?
Separation
of duties
Approval for
write-off
Control over
mail receipts

Use the allowance method
to account for uncollectibles
and estimate uncollectibles
by the percent of sales
and aging approaches.
Objective 2

The Credit Department

✔
Companies grant credit to customers in order to
increase sales.
✔
The credit department evaluates customers who apply
for credit cards.

Uncollectible Accounts Expense
Allowance method
Direct write-off method

Methods for Estimating
Uncollectible Expense
Percentage of Sales
Aging of Receivables

Percentage of Sales
✔
This is also called the income statement
approach.
✔
It is based on prior experience of the business.
✔
It is computed as a percentage of credit sales.
✔
It ignores the current balance of the allowance
account.
✔
The percentage used is adjusted as needed to
reflect collection experience.

Percentage of Sales Example
✔
The credit department of Ana’s Boutique estimates
(based on prior experience) that 1% of net credit sales
are uncollectible.
✔
Net credit sales for the year just ended were $500,000.
✔
What is the adjusting entry?
✔
$500,000 × 1% = $5,000

Percentage of Sales Example
Dec 31, 20xx
Uncollectible Account Expense 5,000
Allowance for Uncollectible Accounts 5,000
Recorded expense for the year

Decrease in
Net Income
Decrease in net
Accounts Receivable
What is the effect of this adjusting entry?
Percentage of Sales Example

Aging of Accounts Receivable
✔
This approach is also called the balance sheet approach
because it focuses on accounts receivable.

✔
Individual accounts receivable from specific customers
are analyzed according to the length of time they
remain outstanding.

Aging of Receivables Example
✔
Assume that International Hospital’s past collection
experience indicates the following:
✔
Length of time % uncollectible 1-30 days
2.0 31-60 days 3.0
61-90 days 5.0
90 + days 8.0

Accounts
Receivable
Allowance for
Uncollectible Accounts
Length Amount %
1-30 $1,900,000 2 $ 38,000
31-60 1,000,000 3 30,000
61-90 700,000 5 35,000
90 + 500,000 8 40,000
Total $4,100,000 $143,000
Aging of Receivables Example

Aging of Receivables Example
✔
The allowance account is adjusted to this $143,000

balance:
✔
Assume that the account currently has a credit balance
of $100,000.
✔
What is the adjustment?

Uncollectible Account
Expense 43,000
Allowance for Uncollectible
Accounts 43,000
To record allowance for uncollectibles
What if the account had a
debit balance of $1,000?
Aging of Receivables

Allowance for Uncollectible
Adjustment
1,000 144,000
Adjusted balance143,000
Aging of Receivables

Comparing the Percentage of Sales
and Aging Methods
Allowance Method
Percent of Sales Method
Aging of Accounts Receivable Method
Adjusts Allowance for
Uncollectible Accounts
Adjusts Allowance for

Uncollectible Accounts
BY TO
UNCOLLECTIBLE
ACCOUNT EXPENSE
UNCOLLECTIBLE
ACCOUNTS RECEIVABLE
Amount of
Amount of

Writing Off
Uncollectible Accounts
✔
What happens when it becomes apparent that an
account will not be collected?
✔
It must be written off.
✔
How?
✔
Debit Allowance for Uncollectible Accounts.
✔
Credit Accounts Receivable.

Recoveries
✔
How is the collection of a previously written- off account
recorded?
✔
Debit Accounts Receivable (to reinstate the account).
✔

Credit Allowance for Uncollectible Accounts.
✔
Debit Cash.
✔
Credit Accounts Receivable (to record the collection).

Use the direct write-off method
to account for uncollectibles.
Objective 3

Direct Write-Off Method
✔
Using this method, an account is written off only when
it becomes uncollectible.
✔
No allowance account is created.
✔
This method is simple to use.
✔
The balance sheet is overstated.
✔
The income statement is understated.

Credit Card and Bankcard Sales
✔
These save retailers the cost of a credit department.
✔
The retailer is required to pay a fee (called a
discount) for usage.

Credit Card and Bankcard Sales
✔
How would Ana’s Boutique record a $100 credit card
sale with a 2% service charge?
Accounts Receivable (credit card) 98
Credit Card Discount 2
Sales Revenue 100
To record a credit card sale of $100
less a 2% service charge fee