Accounting principles chapter 09

Accounting
Principles

Second Canadian Edition
Weygandt · Kieso · Kimmel ·
Trenholm

Prepared by:
Carole Bowman, Sheridan College


CHAPTER

9
ACCOUNTING FOR
RECEIVABLES


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


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.


RECOGNIZING
ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
July 1

Account Titles and Explanation
Accounts Receivable - Adorable Junior
Sales
To record sales on account.

Debit

Credit

1,000

When a business sells merchandise to a
customer on credit, Accounts Receivable is
debited and Sales is credited.

1,000


RECOGNIZING

ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
July 5

Account Titles and Explanation
Sales Returns and Allowances
Accounts Receivable - Adorable
To record merchandise returned.

Debit

Credit

100
100

When a business receives returned merchandise
previously sold to a customer on credit, Sales
Returns and Allowances is debited and
Accounts Receivable is credited.


RECOGNIZING
ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
July 31

Account Titles and Explanation

Cash ($1,000 - $100)
Accounts Receivable - Adorable
To record collection of account.

Debit

Credit

900
900

When a business collects cash from a customer
for merchandise previously sold on credit, Cash
is debited and Accounts Receivable is credited.


RECOGNIZING
ACCOUNTS RECEIVABLE
GENERAL JOURNAL
Date
July 31

Account Titles and Explanation
Accounts Receivable - Adorable
Interest Revenue
To record interest on amount due.

Debit

Credit

13.50
13.50

When financing charges are added to a balance
owing, Accounts Receivable is debited and
Interest Revenue is credited.


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.


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


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.


DIRECT WRITE-OFF METHOD
GENERAL JOURNAL
Date
Jan. 12

Account Titles and Explanation
Debit
Bad Debts Expense
200
Accounts Receivable — E. Schaefer
For write-off of E. Schaefer account.

Credit

Periera Company writes off E. Schaefer’s $200200
balance as uncollectible on January 12. When
this method is used, Bad Debts Expense will
show only actual losses from uncollectibles.


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.


THE ALLOWANCE METHOD
GENERAL JOURNAL
Date

Account Title and Explanation

Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
To record estimate of uncollectible accounts.

Debit

Credit

24,000
24,000

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.


ADORABLE JUNIOR GARMET
Balance Sheet (partial)
Current assets
Cash
Accounts receivable
Less: Allowance for doubtful accounts

$ 14,800
$200,000
24,000

Net Realizable Value

188,000


THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
Mar. 1

Account Titles and Explanation
Allowance for Doubtful Accounts
Accounts Receivable — Nadeau
Write-off of Nadeau account.

Debit

Credit

500

Actual uncollectible accounts are debited to 500
Allowance for Doubtful Accounts and credited to
Accounts Receivable at the time the specific
account is written off.


THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
July 1

Account Titles and Explanation
Accounts Receivable — Nadeau
Allowance for Doubtful Accounts
To reverse write-off of Nadeau
account.

Debit

Credit

500

When there is recovery of an account that has 500
been written off:

1. reverse the entry made to write off the account
and ...


THE ALLOWANCE METHOD
GENERAL JOURNAL
Date
July 1

Account Titles and Explanation
Cash
Accounts Receivable —Nadeau
To record collection from Nadeau.

Debit

Credit

500

500

2. Record the collection in the usual manner.


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.


ILLUSTRATION 9-4

COMPARISON OF BASES OF
ESTIMATING UNCOLLECTIBLES

Percentage of Sales

Percentage of Receivables
Net Realizable Value
Accounts
Receivable

Emphasis on
Income Statement
Relationships

Allowance
for
Doubtful
Accounts

Emphasis on Balance
Sheet Relationships

PERCENTAGE OF SALES BASIS
• In the percentage of sales basis, management
establishes a percentage relationship between
the amount of credit sales and expected losses
from uncollectible accounts.
• Expected bad debt losses are
determined by applying the
percentage to the sales base
of the current period.
• This basis better matches expenses
with revenues.


PERCENTAGE OF
RECEIVABLES BASIS
• Under the percentage of receivables
basis, management establishes a
percentage relationship between the
amount of accounts receivable and the
required balance in the allowance
account.
• This percentage can be applied to
the total accounts receivable balance,
or to individual accounts
receivable balances stratified by age.


PERCENTAGE OF
RECEIVABLES BASIS
• The required balance in the allowance account

is determined by applying the percentage to the
accounts receivable balance at the end of the
current period.
• The amount of the adjusting entry to record
expected bad debt losses for the current period
is the difference between the required balance
and the existing balance in the allowance
account.
• This basis produces the better estimate of net
realizable value of receivables.


DISPOSING OF
ACCOUNTS RECEIVABLE
To accelerate the receipt of cash from
receivables, owners frequently:
1. sell to a factor, such as a finance company
or a bank, and
2. make credit card sales.


DISPOSING OF
ACCOUNTS RECEIVABLE
• A factor buys receivables from businesses
for a fee and collects the payments
directly from customers.
• Credit cards are frequently used by retailers
who wish to avoid the paperwork of issuing
credit.
• Retailers can receive cash more quickly

from the credit card issuer.