Outline

Lecture 6 • Classifications
Classifications of Receivables
of Receivables
• Accounting for uncollectible receivables
• Allowance method & direct write‐off methods 
ll h d & di i ff h d
Receivables for uncollectible receivables
• Promissory Notes and Notes Receivable
Prepared by • Accounts Receivable Turnover and Number of 
Hoang Thi Anh Ngoc days’ sales in Receivables

Classification
C ass cat o o of Receivables
ece ab es Uncollectible Receivables
9 Accounts Receivable—used for selling g merchandise
or services on credit, and normally expected to be Companies often sell their receivables to other
collected in a relatively short period. companies. This transaction is called factoring the
9 Notes Receivable—used to grant credit on the basis receivables, and the buyer of the receivables is called a
of a formal instrument of credit, called a promissory factor.
note.
note Advantages of factoring:
9 Other Receivables—include interest receivable, -The company selling its receivables receives immediate
taxes receivable, and receivables from officers and cash for operating
p g and other needs.
employees. - Some of the risk of uncollectible accounts may be
shifted to the factor

Uncollectible Receivables The Allowance Method

The Allowance Method On December 31, Cynthia Richards estimates that a total
of $4,000 of the $105,000 balance in her company’s
ƒ This method is consistent with the matching principle. Accounts Receivable will eventually be uncollectible.
ƒ Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible. Adjusting Entry
ƒ Uncollectible
U ll tibl A
Accounts
t E
Expense isi ddebited
bit d and
d Dec. 31 Uncollectible Accounts Expense 4 000
Allowance for Doubtful Accounts is credited.
Allowance for Doubtful Accounts 4 000
ƒ Actual accounts that p
prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
 The Allowance Method The Allowance Method

On January 21
21, John Parker’s
Parker s account totaling $610 is
The net amount that is The adjusting entry considered to be uncollectible.
p
expected to be reduces receivables
collected, $101,000 to the NRV and Jan. 21 Allowance for Doubtful Accounts 610
($105,000 – $4,000), is matches uncollectible
Accounts Receivable—John Parker 610
called the net realizable expenses with
value (NRV). revenues. To write off the uncollectible account.

The Allowance Method The Allowance Method

A entry
An t isi made
d tto reinstate
i t t John
J h Parker’s
P k ’ account.
t A second
d entry
t isi made
d tto record
d receipt
i t off th
the cash.
h

Jun. 10 Accounts Receivable – John Parker 610 Jun. 10 Cash 610

Allowance for Doubtful Accounts 610 Accounts Receivable – John Parker 610
To reinstate the account written off on To record collection on account
Jan. 21.

The Allowance Method The Allowance Method

Estimating Uncollectible Accounts Expense
Based on a Percentage of Sales.
The allowance method uses two ways to estimate the
amountt debited
d bit d tto Uncollectible
U ll tibl Accounts
A t Expense.
E
Dec. 31 Uncollectible Accounts Expense 3 000
Allowance for Doubtful Accounts 3 000
1 Estimate based on a percentage of sales
1. sales.
If credit sales for the period are $300,000 and it
is estimated that 1% will be uncollectible,
uncollectible the
Uncollectible Accounts Expense is $3,000.
 The Allowance Method The Allowance Method
Estimating Uncollectible Accounts Expense
Based on an Analysis of Receivables
The allowance method uses two ways to estimate the
amount debited to Uncollectible Accounts Expense.
Expense
Dec. 31 Uncollectible Accounts Expense 2 880
2. Estimate based on analysis of receivables. Allowance for Doubtful Accounts 2 880
If it is estimated that $3,390 of the receivables will be
uncollectible and the Allowance for Uncollectible
Accounts currently has a balance of $510 $510, the
Uncollectible Accounts Expense must be debited
for $$2,880
, ($
($3,390
, –$$510).
)

Accounts Receivable Aging

g g and Uncollectibles Accounts Receivable Aging and Uncollectibles
Not Days Past Due
Total accounts receivable shown by age. Past over
C t
Customer B l
Balance D
Due 1 30
1-30 31 60
31-60 61 90 91-180
61-90 91 180 181-365
181 365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Not Days
y Past Due Brock Co. 470 $ 470
Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150 Saxon Woods 160 160
B. T
B T. B
Barr 610 $ 350 $260 Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Brock Co. 470 $ 470
Uncollectibles
Saxon Woods 160 160 PERCENT 2% 5% 10% 20% 30% 50% 80%
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectible percentages based on
experience
i andd industry
i d t averages.

Accounts Receivable Aging and Uncollectibles Year-End Adjustment for Uncollectibles

Not Days Past Due General Ledger Balance Sheet
Past over
C t
Customer B l
Balance D
Due 1 30
1-30 31 60
31-60 61 90 91-180
61-90 91 180 181-365
181 365 365 Accounts Receivable
Accounts receivable $86,300
Ashby & Co. $ 150 $ 150 A 86,300
B. T. Barr 610 $ 350 $260 Less allowance for
Brock Co. 470 $ 470 doubtful accounts 3,390 C
Allowance for Doubtful Accts. Net realizable value $82,910
Saxon Woods 160 160 510 A
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300 2 880
2,880 B A Balances before adjustment
3,390 C
Uncollectibles Uncollectible Accts. Expense Year-end adjustment:
2% 5% 10% 20% 30% 50% 80%
B
PERCENT B 2,880 $
$3,390 – $510
$ =$
$2,880

$3,390
$ , =$
$1,500
, $200
$ $310
$ $380
$ $360
$ $400
$ $240
$
C Balance after adjustment
AMOUNT
 Accounting for Uncollectible Accounts
Receivable The Direct Write-Off Method
On May y 10,, D. L. Ross’ account was determined to be
The Direct Write
Write-Off
Off Method
uncollectible. The $420 balance is written off the books.

ƒ This method is not consistent with the matching

principle. May 10 Uncollectible Accounts Expense 420

ƒ Accounts that prove to be uncollectible are written off in Accounts Receivable—D. L. Ross 420
the year they become worthless. To write off an uncollectible account.
ƒ Uncollectible Accounts Expense is debited and
Accounts Receivable is credited for each such
transaction.

The Direct Write-Off Method The Direct Write-Off Method

In November,, D. L. Ross remits a check for $420
$ in A second entry
y is needed to record receipt
p of the cash.
payment of his account.

N
Nov. 1 Cash
C h 420
May 10 Accounts Receivable—D. L. Ross 420 Accounts Receivable—D. L. Ross 420
Uncollectible Accounts Expense 420 To record collection on account
account.
To reinstate account written off on
May 10.

Notes Receivable Notes Receivable

A promissory note is a written document
2,500.00
$_____________ containing a promise to pay:
Fresno, California______________20___
March 16 06
y days
Ninety y
________________ _
_AFTER DATE _______
We PROMISE TO PAY TO
9 a specific amount of money (principal)
Judson Company Payee
THE ORDER OF ____________________________________________
Two thousand five hundred 00/100---------------------------
_________________________________________________DOLLARS
9 to a specific person or company (payee)
City National Bank
PAYABLE AT ______________________________________________ 9 at a specific place
VALUE RECEIVED WITH INTEREST AT ____10%
NO _______
NO. 14 DUE___________________
DUE June 14
14, 2006
9 on a specific date or upon demand
H. B. Lane Maker 9 plus interest at a specific percentage of the
TREASURER, WILLIARD COMPANY principal (face) amount per year
 Notes Receivable Notes Receivable

Total days in note 90 days

• The date a note is to be paid is called the due Number of days in March 31
date. It is also referred to as the maturity date. Issue date of note March 16
• The amount that is due at the maturity or due Remaining days in March –15 days
date is called the maturity value. 75 days
Number of days in April –30
30 days
• Let’s determine the due date for a 90-day note 45 days
dated March 16. Number of days in May –31 days
Residual days in June 14 days
Due date for a 90-day
y note dated March 16: June 14

Notes Receivable Accounting for Notes Receivable

Received a $6,000, 12%, 30-day note dated November
21 2006 in settlement of the account of W
21, W. A Bunn Co
Co. A$$6,000
, 30-day,
y, 12% note dated November 21 is received
from W. A Bunn Company in exchange for merchandise.
Interest Calculation
Principal x Rate x Time = Interest Nov. 21 Notes Receivable 6 000
Sales 6 000
$6,000
$ , x 12% x 30/360 = $
$60.00
Received 30-day, 12% note dated
November 21, 2006.
Maturity
y Value Calculation
Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00

Accounting for Notes Receivable Accounting for Notes Receivable

On December 21,, when the note matures,, the firm receives If W. A. Bunn Company
p y fails to p
payy the note on the due date,,
$6060 from W. A. Bunn Company ($6,000 plus $60 interest). it is considered a dishonored note receivable. The note and
interest are transferred to the customer’s account.
Dec. 21 Cash 6 060
Notes Receivable 6 000 Dec. 21 Accounts Receivable—Bunn Co. 6 060

Interest Revenue 60 N
Notes R
Receivable
i bl 6 000
Received principal and interest on Interest Revenue 60
matured note. To record dishonored note and interest
interest.
 Accounting for Notes Receivable Accounting for Notes Receivable
A 90-day,
y, 12% note dated December 1,, 2006,, is received Assuming g that the accounting
gp period ends on December 31,,
from Crawford Company to settle its account, which has a an adjusting entry is required to record the accrued interest
balance of $4,000. of $40 ($4,000 x 0.12 x 30/360).

Dec. 1 Notes Receivable 4 000 Dec. 31 Interest Receivable 40

A
Accounts R
Receivable—Crawford
i bl C f d Company
C 4 000 I
Interest Revenue
R 40
Received note in settlement of account. Adjusting entry for accrued interest.

Receivables on the Balance Sheet

Accounting for Notes Receivable
On March 1,, 2004,, $4,120
$ , is received for the note ($4,000)
($ , ) Crabtree Co. Balance Sheet
and interest ($120). December 31, 2006

Assets
Current assets:
Dec. 21 Cash 4 120
Cash $119,500
Notes Receivable 4 000 Notes receivable 250,000
Interest Receivable 40 Accounts receivable $445,000
Interest Revenue 80 Less allowance for
doubtful accounts 15,000 430,000
R
Received
i d payment on note and
d iinterest. Interest receivable 14,500
$4,000 x 0.12 Merchandise inventory 714,000
x 60/360

Financial Analysis and Interpretation Accounts Receivable Turnover

2006 2005
Accounts Receivable Turnover Net sales on account $36 000 000
$36,000,000 $32 500 000
$32,500,000
Accounts receivable (net):
Net sales Beginning of year $ 1,080,000 $1,050,000
End of yyear 1,220,000
, , 1,080,000
, ,
A
Average accounts
t receivable
i bl Total $2,300,000 $2,130,000
Average $1,150,000 $1,115,000

Accounts receivable turnover 31.3 times 29.1 times

Number of Days’ Sales in Receivables

Use: To assess the efficiencyy

Accounts receivable, end of year in collecting receivables $32,500,000
$1,115,000
Average daily sales and in the management $36,000,000
of credit.
credit $1 150 000
$1,150,000
 Number of Days’
y Sales in Receivables Homework
Accounts receivable,, end of year
y • Send via email
Average daily sales

$1,220,000
=12.4 days
($36,000,000 ÷ 365 days)

Use: To assess the efficiency in collecting receivables

and in the management of credit.