Accounting for Receivables - Chapter 8

Chapter 8: Accounting for Receivables

• This chapter covers accounting for accounts receivable, including doubtful accounts, write-offs, and recoveries. It also explains accounting procedures for notes receivable.

Case Study

• A case study, located on page 336, focuses on collecting payments from clients who are difficult to contact.

Learning Goals

• Students will learn to record transactions related to accounts receivable.
• This includes transactions related to doubtful accounts, write-offs, and recoveries.
• Students will also learn accounting procedures for notes receivable.

Accounting for Receivables

• Accounts Receivable:

  • Recognition and valuation

• Notes Receivable:

  • Recognition and disposition

• Statement Presentation:

  • Presentation
  • Analysis: Cash receipts from receivables
  • Accelerating cash receipts from receivables

Brief Exercises (BE8-1)

• This exercise uses seven financial transactions to demonstrate how accounting entries affect accounts receivable, notes receivable, total assets, total liabilities, and owner's equity.

Chapter 8: Success Criteria

• Calculate the net realizable value of accounts receivable and account for bad debts.
• Account for notes receivable.

Valuing Accounts Receivable

• Some receivables become uncollectible.
• Uncollectible receivables are not reported as assets if there is no future benefit (net realizable value).
• Receivables are written down to reflect the collectible amount. This is done by recording bad debt expense during the period related revenues are recorded.

The Allowance Method

• Estimate uncollectible receivables and record them at the end of the period.
• Actual uncollectibles are written off against the allowance.
• Write-offs are reversed and collections are recorded if a previously written-off account is recovered.

Allowance for Doubtful Accounts

• Deducted from accounts receivable on the balance sheet.
• Net realizable value = Accounts Receivable − Allowance for Doubtful Accounts.

Estimating the Allowance: Percentage Receivables Approach

• Calculates the percentage of receivables estimated to be uncollectible.
• Based on past experience and credit policies.
• Can be applied to total receivables balance or grouped by age (aging schedule is required).
• Used to estimate net realizable value; this method is also known as the balance sheet method.

Teaching the Class

• Column 1: Focuses on unadjusted credit balance in the allowance account. Complete exercises BE8-6 a), BE8-7 a) and c).
• Column 2: Focuses on unadjusted debit balance in the allowance account. Complete exercises BE8-6 b), BE8-7 a) and b).
• Column 3: Analyses write-offs and subsequent recoveries related to net income and net realizable value of accounts receivable. Complete exercises BE8-9 and BE8-10.

Additional Exercises (BAT4M)

• Exercises E8-4, E8-7, and P8-3 are also referenced.

Recording Estimated Uncollectibles

• Debits bad debts expense and credits allowance for doubtful accounts.

Recording Write-Off of Uncollectible Accounts

• The amount written-off is debited to the allowance and the expense is not increased. The expense was previously recognized when the allowance was initially recorded.

Recovery of an Uncollectible Account

• Reverse the original write-off.
• Record the collection as usual.

Notes Receivable

• Credit may be granted in exchange for a promissory note.
• A promissory note is a written promise for payment. It can be for payment on demand or at a definite time.
• Notes receivable can come from financing a purchase, lending money, or extending the account receivable beyond the normal due date and may include interest in the terms.
• The party promising payment is the maker, and the recipient is the payee.

Recording Interest

• Interest is calculated based on the principal amount, annual interest rate, and the fraction of a year.
• Usually, separate interest receivable accounts are used to record interest.

Recognizing Notes Receivable

• A note can be received to pay an outstanding account receivable.
• If received for cash, credit is to Cash.
• Notes are valued at net realizable value.

Disposing of Notes Receivable

• A note is honored when paid in full at its maturity date. Amount due is equal to principal + interest.
• Note is dishonored when not paid in full at maturity. Balance transferred to Accounts Receivable.