WEEK 9

Accounting for
Receivables
Accounting for Payables

LEARNING OBJECTIVES
1. Define the different types of receivables
2. Define accounts receivable, and discuss how
accounting recognises and values them
3. Explain the nature of bad and doubtful debts
and how to account for them
4. Identify the principles involved in the
management and control of accounts
receivable
5. Describe the nature of bills receivable and how
to account for them
6. Current Liabilities- Accounting for Bills
Payables, Warranties and Employee benefits

TYPES OF RECEIVABLES
Accounts Receivable
Specifically relate to the sale of goods or provision
of services

Bills Receivable
More formal arrangement than account receivable
Mostly used for financing purposes

Other Receivables
Similar to accounts receivable but not related to
goods or services
Loans to directors

ACCOUNTS RECEIVABLE
Also known as Trade Debtors
Recognition
Usually at time of sale
Need to consider discounts and allowances

Valuation
Not all amounts owing will be collected
Need to account for estimate of amount
that will become bad

BAD AND DOUBTFUL

DEBTS
Risk of doing business on credit
Minimised through credit checks
Unpaid amounts represent a
business expense
Written off periodically
Two methods to account for bad
debts
Allowance method
Direct write-off method

ALLOWANCE METHOD OF
ACCOUNTING FOR BAD
DEBTS

Estimate of doubtful debts made

at the end of the period
Adjusting entry recognises
expense and contra-asset
General Journal
June Bad Debts Expense
30
Allowance for Doubtful Debts
(Estimated bad debts expense)

6 000
6 000

ALLOWANCE METHOD OF
ACCOUNTING FOR BAD DEBTS

Records the expense in same

period as the income to which it
relates
Creates an allowance that will be
deducted from accounts receivable
on the balance sheet
Contra asset account
AASB 137 Provisions, Contingent
Liabilities and Contingent Assets

ALLOWANCE METHOD OF
ACCOUNTING FOR BAD DEBTS
CC LTD
Balance Sheet (partial)
as at 30 June 2013
CURRENT ASSETS
Cash at bank
Accounts Receivable
Less: Allowance for doubtful debts
Inventory
TOTAL CURRENT ASSETS

$ 58 500
$110 000
6 000

104 000
71 000
$233 500

ESTIMATING DOUBTFUL DEBTS

Generally based on combination of
Past experience
Forecasts of future economic and business
conditions

Involves considerable degree of

judgement
Two common methods
Percentage of net credit sales
Income Statement method

Ageing of accounts receivable

Balance Sheet method

PERCENTAGE OF
NET CREDIT SALES METHOD

History of bad debts is analysed to

establish relationship between
credit sales and bad debts
GST is excluded from calculation
Year-end adjustment to recognise
General Journal
bad debts expense
June Doubtful Debts Expense
30

Allowance for Doubtful Debts

(Bad debts expense for the year,
1% of Credit Sales (ex GST))

8 470

8 470

AGEING OF ACCOUNTS RECEIVABLE

METHOD
Based on length of time owing
Older accounts statistically more likely to
be bad
Past accounting records analysed
Calculates the amount the allowance for
doubtful debts should be, therefore what
is recorded is an adjustment to the year
end balance
Approach consistent with the Conceptual
Framework

EXAMPLE - AGEING OF ACCOUNTS

RECEIVABLE METHOD

EXAMPLE - AGEING OF ACCOUNTS

RECEIVABLE METHOD
Estimated bad
debts amt
%
Amount
1
$ 616
5
583

Age Category
Amount
Not yet due
$61 600
1-30 days
11 660
overdue
31-60 days
7 260
10
overdue
61-90 days
4 620
20
overdue
91-180 days
4 180
30
overdue
Percentage is judgement
only
Over 180 days
2 640
60

726
924
1 254
13
1 584

EXAMPLE - AGEING OF ACCOUNTS

RECEIVABLE METHOD

Total estimate to become bad of

$5687 includes $517 (1/11) of GST
which is excluded from the
allowance
Assume existing allowance is
$1540
General Journal
June Doubtful
Debts Expense
630
Top-up
needed
is $5170 - 3$1540
=
30
$3630 Allowance for Doubtful Debts
3 630
(Bad debts expense for the year)

EXAMPLE - AGEING OF ACCOUNTS

RECEIVABLE METHOD

T-Account impact
Allowance for Doubtful Debts
Balance c/d

Balance (before adjustment)

1 540
5 170 Bad Debts Expense
5 170
3 630
5 170
Balance b/d
5 170

Exercise 1
Kerries Cakes Ltd bases their estimation of the
years bad debt expense on 2% of net credit
sales. The following information is supplied:
Opening balance in Allowance account is $2,100cr
Sales for the year are $800,000 (excl GST)
Closing balance of Accounts receivable is $550,000
(including GST)
Sales returns are $30,000
Required: Prepare the Journal entry to record
bad debts expense on 30 June 2012.
16

Exercise 2
Kerries Cakes Ltd bases their estimate of bad
debt expense as 2% of their accounts receivable
balance:
Opening balance in Allowance account is $2,100cr
Sales for the year are $800,000 (excl GST)
Closing balance of Accounts receivable is $550,000
(incl GST)
Sales returns are $30,000
Required: Prepare the Journal entry to record
bad debts expense on 30 June 2012.
17

Compare the two T

accounts

Allowance for
Doubtful debts
1/07/201

NCS
open
bal

2,100

Bad debt
expense

30/06/2012Clos bal

17,10
0
Allowance
for
Doubtful debts
17,10
0 1/07/201

*15,000
Ageing
method
open 17,100
bal
2,100

Bad debt
expense

18
*7,900

DIRECT WRITE-OFF METHODWHEN THERE IS NO ALLOWANCE ACCOUNT

Bad debts charged to expense when

debt is considered uncollectable
No allowance for doubtful debts is
made beforehand
General Journal
Jul 31 Bad Debts Expense
GST Collections
Accounts Receivable Control
J. Evans
(Write-off of J. Evans account as
bad)

620
62
682

19

WRITING OFF BAD

DEBTS
Accounts Receivable Control
Balance (before write-off)
Allowance for Doubtful Debts
91 960 and GST Collections
682
_
_ Balance c/d
91 960
91 278
Balance b/d
91 960
91 278
Allowance for Doubtful Debts
Accounts Receivable Control/ Balance (before write-off)
J. Evans
5 170
620
Balance c/d
___ _
4 550
5 170
5 170 Balance b/d
4 550

RECOVERY OF AN ACCOUNT
WRITTEN OFF- WHEN OLD
CUSTOMER PAYS

Need to update subsidiary ledger and

record cash receipt
Recovery treated as revenue
General Journal
Nov 4 Accounts Receivable ControlJ.
Evans
GST Collections
Bad Debts Recovered

275
25
250

(Re-establish part account

written off)

21

Exercise 3
Kerries Cakes Ltd has a debtor M. Dodgy who
has not paid their account. Enquiries show
that the debtor is insolvent (no money).
On 7/7/12 Kerrie writes off M. Dodgys account
balance of $616.00 ( including GST).
Required: Prepare the Journal entry to
record the write off of Dodgys account.

22

Exercise 4
On 10th January 2013 M. Dodgy pays
20% of the amount outstanding. There is
no further expectation of any monies
from Dodgy.

Required: Record the journal

entries for the collection of the
money from Dodgy.

23

BILLS RECEIVABLE
Used for extending credit beyond
normal trading transactions
Bills of Exchange Act 1909
Trade bills
Promissory notes

Need to be able to
Determine due date
Calculate interest on bills and notes

EXAMPLE OF TRADE BILL AND

PROMISSORY NOTE

EXAMPLE ACCOUNTING FOR

RECEIPT OF BILL RECEIVABLE

Receipt of bill in settlement of

overdue account receivable from
D. Mead
$1500, 90-day
billJournal
at 15% interest
General
Jul 9 Bills Receivable
Accounts Receivable D.
Mead
Unearned Interest Income
(Receipt of a note in settlement
of an account receivable)
[Interest = $1500 x 0.15 x
90/365]

1
555.48
1
500.00
55.48

EXAMPLE ACCOUNTING FOR

COLLECTION OF BILL RECEIVABLE

Receipt of cash on payment of the

note by the debtor at maturity
date
General Journal
Oct. 7 Cash at Bank

1
555.48

Bills Receivable

1
555.48

(Collection of promissory note

D.Mead)
Unearned Interest Income
Interest Income
(Interest earned on note

55.48
55.48

CURRENT LIABILITIES
Accounts payable (trade creditors)
Amounts owed for purchase of inventory,
supplies and services as part of the
business operating cycle

Bills payable
Evidenced by a bill of exchange of a
promissory note
Trade bills
Commercial bills
28

EXAMPLE BILLS
PAYABLE
BD Ltd previously purchased inventory
from
R Smith on credit for $4000. On 1
August, Smith agreed to accept a 90Journal
day, 10% bill General
to cover
account payable
Aug. 1 Accounts Payable R. Smith
Unexpired Interest
Bills Payable
(Receipt of bill for Account payable)
[Interest = $4000 x 0.10 x 90/365]

4
000.00
98.63
4
098.63
29

LIABILITIES -EMPLOYEE BENEFITS

Amounts deducted from an employees

gross pay are liabilities of the
employer, who acts as a collection
General
Journal
agent for various
organisations
Jun. Wages and Salaries Expense
28

3 650

PAYG Payable

748

BT Superannuation Fund payable

191

AAMI Insurance Ltd payable

HCF Medical Fund payable
Wages and Salaries Payable
(Payroll for the week ending 28 June)

90
178
2 443
30

WARRANTIES
Set up a provision account which is an
estimate of future obligations for inventory
sold
Any warranty returns are debited to the
General Journal
provision account
Jun. Warranty Expense
30

70 000

Provision for Warranties

70 000

(Provision for warranty expense

related to sales made in the year
ended 30 June)
Jul. 15 Provision for Warranties
Cash at Bank

350
31

350