Chapter 8

Receivables
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

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Professor Emeritus of Accounting
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 Objectives
1. List the common classifications of
receivables.After studying this
2. Summarize chapter, you should
and provide examples of
internal controlbeprocedures
able to: that apply to
receivables.
3. Describe the nature of and the
accounting for uncollectible receivables.
4. Journalize the entries for the allowance
method of accounting for uncollectibles,
and estimate uncollectible receivables
based on sales and on an analysis of
receivables.
 Objectives
5. Journalize the entries for the direct write-off
of uncollectible receivables.
6. Describe the nature and characteristics of
promissory notes.
7. Journalize the entries for notes receivable
transactions.
8. Prepare the Current Assets presentation of
receivables on the balance sheet.
9. Compute and interpret the accounts
receivable turnover and the number of days’
sales in receivables.
Classification of Receivables
✓ Accounts Receivable—used for selling
merchandise or services on credit, and
normally expected to be collected in a
relatively short period.
✓ Notes Receivable—used to grant credit on the
basis of a formal instrument of credit, called a
promissory note.
✓ Other Receivables—include interest
receivable, taxes receivable, and receivables
from officers and employees.
 Separating the Receivable Functions

Credit
Credit Info.
Approval

Collections
Goods
or Acctg.
services Invoice Info

Sales Acctg.
Info.
Accounting
Uncollectible Receivables

Companies often sell

their receivables to other
companies. This
transaction is called
factoring the
receivables, and the
buyer of the receivables
is called a factor.
 Uncollectible Receivables
The Allowance Method
▪ This method is consistent with the matching
principle.
▪ Management makes an estimate each year of the
portion of accounts receivable that may not be
collectible.
▪ Uncollectible Accounts Expense is debited and
Allowance for Doubtful Accounts is credited.
▪ Actual accounts that prove to be uncollectible are
debited to Allowance for Doubtful Accounts and
credited to Accounts Receivable.
 The Allowance Method
On December 31, Cynthia Richards estimates
that a total of $4,000 of the $105,000 balance in
her company’s Accounts Receivable will
eventually be uncollectible.

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 4 000 00
Allowance for Doubtful Accounts 4 000 00
 The Allowance Method
The net amount that is
expected to be collected,
$101,000 ($105,000 –
$4,000), is called the net
realizable value (NRV).

The adjusting entry

reduces receivables to
the NRV and matches
uncollectible expenses
with revenues.
The Allowance Method

The
adjusting
entry fills
the bucket.
Allowance
for
Doubtful
Accounts
The Allowance Method

Writing off
accounts
empties the
bucket.
 The Allowance Method

Jan. 21 Allowance for Doubtful Accounts 610 00

Accounts Receivable—John Parker 610 00
To write off the uncollectible
account.

On January 21, John

Parker’s account totaling
$610 is considered to be
uncollectible.
 The Allowance Method

Jun. 10 Accounts Receivable—John Parker 610 00

Allowance for Doubtful Accounts 610 00
To reinstate the account
written off on Jan. 21.

An
Onentry
June is
10,made to reinstate
the written-off
John Parker’s
account account.
is collected.
 The Allowance Method

Jun. 10 Cash 610 00

Accounts Receivable—John Parker 610 00
To record collection on
account.

A second entry is made to

record receipt of the cash.
 The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and
it is estimated that 1% will be uncollectible,
the Uncollectible Accounts Expense is $3,000.
 The Allowance Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 3 000 00
Allowance for Doubtful Accounts 3 000 00

Based on a Percentage of Sales

 The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to
estimate the amount debited to Uncollectible
Accounts Expense.
2. Estimate based on analysis of receivables.
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, the Uncollectible Accounts Expense must be
debited for $2,880 ($3,390 – $510).
 The Allowance Method

Adjusting Entry
Dec. 31 Uncollectible Accounts Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00

Based on an Analysis of Receivables

 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Total accounts receivable

shown by age.
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

Uncollectible percentages based on

experience and industry averages.
 Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over
Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150
B. T. Barr 610 $ 350 $260
Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles
PERCENT 2% 5% 10% 20% 30% 50% 80%

AMOUNT $3,390 = $1,500 $200 $310 $380 $360 $400 $240

 Year-End Adjustment for Uncollectibles
General Ledger Balance Sheet
Accounts Receivable
Accounts receivable $86,300
A 86,300 Less allowance for
doubtful accounts 3,390
Allowance for Doubtful Accts.
Net realizable value $82,910
510 A
2,880 B
A Balances before adjustment
3,390 C

B Year-end adjustment:
Uncollectible Accts. Expense
B 2,880 $3,390 – $510 = $2,880

C Balance after adjustment

Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
▪ This method is not consistent with the
matching principle.
▪ Accounts that prove to be uncollectible
are written off in the year they become
worthless.
▪ Uncollectible Accounts Expense is
debited and Accounts Receivable is
credited for each such transaction.
 The Direct Write-Off Method
May 10 Uncollectible Accounts Expense 420 00
Accounts Receivable—D. L. Ross 420 00
To write off an uncollectible
account.

On May 10, D. L. Ross’ account was

determined to be uncollectible. The
$420 balance is written off the books.
 The Direct Write-Off Method
Nov. 1 Accounts Receivable—D. L. Ross 420 00
Uncollectible Accounts Expense 420 00
To reinstate account written
off on May 10.

1st Entry

In November, D. L. Ross remits a check

for $420 in payment of his account.
 The Direct Write-Off Method

Nov. 1 Cash 420 00

Accounts Receivable—D. L. Ross 420 00
To record collection on
account.

2nd Entry
A second entry is needed to record
receipt of the cash.
 Notes Receivable

2,500.00
$_____________ Payee
Fresno, California______________20___
March 16 06
Ninety days
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Judson Company
THE ORDER OF ____________________________________________
Two thousand five hundred 00/100---------------------------
_________________________________________________DOLLARS
City National Bank
PAYABLE AT ______________________________________________
Maker
VALUE RECEIVED WITH INTEREST AT ____10%
14
NO. _______ June 14, 2006
DUE___________________
H. B. Lane
TREASURER, WILLIARD COMPANY
 Notes Receivable
A promissory note is a written
document containing a promise to pay:
✓ a specific amount of money (principal)
✓ to a specific person or company (payee)
✓ at a specific place
✓ on a specific date or upon demand
✓ plus interest at a specific percentage of
the principal (face) amount per year
Notes Receivable
Let’s determine
The date a note isthe due
to be paid is
date forthea due
called 90-day
date.note
It is also
referred
datedtoMarch
as the maturity
16. date.
 Notes Receivable
Total days in note 90 days
Number of days in March 31
Issue date of note March 16
Remaining days in March –15 days
75 days
Number of days in April –30 days
45 days
Number of days in May –31 days
Residual days in June 14 days

Answer: June 14
Notes Receivable

The amount that is due at the

maturity or due date is called
the maturity value.
 Notes Receivable

Received a $6,000, 12%, 30-day note

dated November 21, 2006 in settlement
of the account of W. A Bunn Co.
 Notes Receivable

Interest Calculation
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00

Maturity Value Calculation

Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00
 Accounting for Notes Receivable
Nov. 21 Notes Receivable 6 000 00
Sales 6 000 00
Received 30-day, 12% note
dated November 21, 2006.

A $6,000 30-day, 12% note dated

November 21 is received from W. A Bunn
Company in exchange for merchandise.
 Accounting for Notes Receivable
Dec. 21 Cash 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
Received principal and interest
on matured note.

On December 21, when the note matures,

the firm receives $6060 from W. A. Bunn
Company ($6,000 plus $60 interest).
 Accounting for Notes Receivable
Dec. 21 Accounts Receivable—Bunn Co. 6 060 00
Notes Receivable 6 000 00
Interest Revenue 60 00
To record dishonored note and
interest.

If W. A. Bunn Company fails to pay the note on

the due date, it is considered a dishonored note
receivable. The note and interest are transferred
to the customer’s account.
 Accounting for Notes Receivable
Dec. 1 Notes Receivable 4 000 00
Accounts Receivable—Crawford
Company 4 000 00
Received note in settlement of
account.

A 90-day, 12% note dated December 1, 2006,

is received from Crawford Company to settle
its account, which has a balance of $4,000.
 Accounting for Notes Receivable
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Adjusting entry for accrued
interest.

Assuming that the accounting period

ends on December 31, an adjusting entry
is required to record the accrued interest
of $40 ($4,000 x 0.12 x 30/360).
 Accounting for Notes Receivable
Mar. 1 Cash 4 120 00
Notes Receivable 4 000 00
Interest Receivable $4,000 x 40 00
Interest Revenue 0.12 x 80 00
Received payment on note and 60/360
interest.

On March 1, 2004, $4,120 is received for

the note ($4,000) and interest ($120).
 Receivables
on the
Balance Sheet
 Crabtree Co. Balance Sheet
December 31, 2006

Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000 430,000
Interest receivable 14,500
Merchandise inventory 714,000

Highlighted items are receivables

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

Accounts receivable turnover 31.3 times 29.1 times

Use: To assess the efficiency
in collecting receivables $36,000,000 $32,500,000
and in the management $1,150,000 $1,115,000
of credit.
 Number of Days’ Sales in Receivables

Accounts receivable, end of year

Average daily sales

Accounts receivable,
$1,220,000end of year
=12.4 days
Average daily sales
($36,000,000 on account
÷ 365 days)

Use: To assess the efficiency in collecting

receivables and in the management of credit.
Chapter 8

The End