Financial

Accounting:1
Tools for Business DecisionMaking
Fifth Canadian Edition

Prepared By:
Debbie Musil
Kwantlen Polytechnic
University

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C H APT ER
2

1
Reporting and
Analyzing Receivables
Study Objectives

1.

Explain how accounts receivable are recognized and valued in the

accounts.

2.

Explain how notes receivable are recognized and valued in the

accounts.

3.

Explain the statement presentation of receivables.

4.

Apply the principles of sound accounts receivable management.

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Types of Receivables
1
Amounts due to a business from its
customers or other entities
Expected to be collected in cash
Frequently classified as
Accounts receivable amounts owed by
customers due to the sale of goods and services
Notes receivable formal credit instrument
(written promise to pay)

Other receivables such as interest receivable,

loans and advances to employees, recoverable
sales and income tax, etc.
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Accounts Receivables
1
A receivable is recorded when service is
provided on account or at point of sale of
merchandise on account
A receivable is reduced when cash is
collected, a sales discount is taken, or the
product is returned by the customer

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Accounts Receivable Subsidiary

Ledger
1
Subsidiary ledger is a group of accounts
that share a common characteristic (i.e.
they are all receivable accounts)
The subsidiary ledger for accounts
receivable provides the details that
support the total balance for accounts
receivable in the general ledger
The single accounts receivable account in the
general ledger is the control account

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Interest Revenue
1
If a customer does not pay in full within a
specified period of time (usually 30 days),
an interest (financing) charge may be added
to the balance due
Seller recognizes interest revenue and increases
the account receivable balance owed by the
customer

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Discussion Question
1
What kind of receivables would a hospital
report on its balance sheet?

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Recording Estimated
Uncollectible Accounts 1
Some accounts receivable become
uncollectible
Losses from these uncollectible accounts
are debited to an account called Bad Debts
Expense
Bad debts expense is recognized in the same
period that the related sales revenue is
generated

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CHAPTER

Allowance Method
1
This method estimates the uncollectible
accounts at the end of each period
The amount estimated is shown in the
Allowance for Doubtful Accounts
A contra asset account that is shown below
Accounts Receivable

Note that the allowance is an estimate it

does not show specific customer accounts

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Three Features of the

Allowance Method 1

1. Recording estimated uncollectible accounts

Any increase to the allowance is recorded as bad

debts expense

2. Recording the write-off of an uncollectible

account

Actual accounts are written off when they are

determined to be uncollectible

This write-off reduces the allowance

3. Recording the recovery of an uncollectible

account

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If a written-off account is later collected, the

write-off is reversed and the collection recorded
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Recording Estimated
Uncollectible Accounts

The balance in the Allowance for Doubtful Accounts

is deducted from Accounts Receivable in the current
assets section of the statement of financial position:

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Estimating the Allowance

1
Most companies use the percentage of
receivables basis to determine the
allowance
Estimate what percentage of receivables are
likely to be uncollectible
Apply this percentage to total receivables, or
Apply this percentage to receivables classified
according to the length of time they have been
outstanding (called aging the accounts
receivable)
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CHAPTER

Estimating the Allowance

(Continued)
1
Once the appropriate estimate for
uncollectible accounts is determined, an
adjusting entry can be recorded
The amount of the adjusting entry is the
difference between the required balance
and the existing balance in the allowance
account

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Recording the Write-Off of an Uncollectible

Account
The vice president of finance authorizes a write-off
of $2,500 owed by T. Ebbet:

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Recording the Recovery of an Uncollectible

Account
Record in two separate entries:

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Discussion Question
1
Why is it important that bad debt expense is
recorded in the same period as the related
revenue?

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Notes Receivable
Stronger legal claim to assets than
accounts receivable; written promise
(promissory note) to repay

A credit instrument that normally:

Requires the payment of interest
Extends for time periods greater than 30 days

Often accepted from customers who need

to extend payment of an account
receivable
Often required from high risk customers
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Formula for Calculating Interest

The basic formula for calculating interest on an
interest-bearing note is:
Face Value
of Note

Annual
Interest
Rate

Time in
Terms of
One Year

Interest

The interest rate specified on the note is an annual

rate of interest.
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Honouring and Dishonouring

Notes Receivable
1

Honoured

Paid in full at maturity date

Collection recorded

Dishonoured
Not paid at maturity date; note no longer
negotiable
Balance transferred to Accounts Receivable if
eventual collection expected
Balance transferred to Allowance for Doubtful
Account if eventual collection not expected
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Discussion Question
1
What are the main differences and similarities
between accounts receivable and notes
receivable?

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Statement Presentation
1
Statement of Financial Position
Reported in the current assets section
Following cash and short-term investments
Only required to disclose net realizable value,
but helpful to disclose gross receivables and the
allowance for doubtful accounts

Income Statement
Bad debts expense is reported as an operating
expense
Interest revenue is non-operating
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Managing Receivables
1
Determine to whom to extend credit

Establish a payment period

Monitor collections
Prepare and update an accounts receivable
aging schedule

Evaluate the liquidity of receivables

Accelerate cash receipts from receivables
when necessary

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Evaluating the Liquidity of

Receivables
1
Liquidity is measured by how quickly
certain assets can be converted into cash
Receivables turnover
Average collection period

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Receivables Turnover
1
Is a measure of the liquidity of receivables

Receivables Turnover =
Net Credit Sales
Average Gross Receivables
Higher is better

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Average Collection Period

1
Is the average amount of time that a
receivable is outstanding

Average Collection Period =

365 days
Receivables
Turnover

Lower is better

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Discussion Question
1
What do the receivables turnover ratio and
average collection period reveal?

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Accelerate Cash Receipts from

Receivables
1
Loans secured by receivables

Sale of receivables
Securitization
Factoring

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Comparing IFRS and ASPE

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Copyright Notice

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