Accounting for Receivables Quiz

Accounting for Receivables

• Companies recognize accounts receivable when goods or services are sold on credit.
• Receivables are classified as accounts receivable, notes receivable, and other receivables.
• Accounts receivable represent amounts due from customers for goods or services sold.
• Notes receivable represent amounts due from customers, with a formal written promise to pay.
• Nontrade receivables include interest, loans to officers, advances to employees, and taxes.
• Companies value receivables based on their cash realizable value.
• Uncollectible receivables are accounted for using the allowance method or the direct write-off method
• The allowance method is preferred for financial reporting
• The direct write-off method is not acceptable under generally accepted accounting principles (GAAP)

Recognizing Accounts Receivable

• Service organizations recognize receivables when they perform a service on account.
• Merchandisers recognize accounts receivable at the point of sale of merchandise on account.

Valuing Accounts Receivable

• Accounts receivable are current assets.
• Valuation is based on cash realizable value, accounting for expected collections.
• Companies use the allowance method to estimate uncollectible receivables, recording a bad debt expense.
• Recording is done by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.

Disposing of Accounts Receivables

• Companies sell receivables to collect cash quickly.
• Factoring is the process of selling receivables to a factor (finance company or bank).
• Credit card sales are recorded as cash sales.
• Retailers pay a fee to the card issuer to process transactions.

Recognizing Notes Receivable

• Companies grant credit in exchange for a promissory note.
• A promissory note is a written promise to pay a specified amount of money.
• Promissory Notes can be used in a few ways such as when individuals and companies lend or borrow money, when transaction amounts exceed normal limits, or in settlement of accounts receivable.
• Promissory notes are used on a variety of transactions.

Valuing Notes Receivable

• Short-term notes receivable are reported at their net realizable value.
• The estimation of cash realizable value and bad debt expense are done similarly for accounts receivable.
• Allowance for Doubtful Accounts is applied.

Disposing of Notes Receivable

• Notes can be held until maturity date.
• Default may lead to adjustments.
• Notes can be sold to speed up the collection process.

Honor and Dishonor of Notes Receivable

• Honor: Maker pays the note in full by the maturity date.
• Dishonor: Maker fails to pay the note in full by the maturity date.

Accrual of Interest Receivable

• If financial statements are prepared before the maturity date, interest revenue is accrued.
• An adjusting entry is created to record the accrued interest revenue and the interest receivable.

Analysis of Receivables

• Accounts receivable turnover is calculated to assess how well a company manages its credit and collection processes.
• The average collection period measures the average number of days it takes to collect on credit sales.

IFRS and GAAP Comparison

• Both follow the same basic principles for recording receivables, recognizing sales returns and allowances, and using the allowance method.
• However, there are some differing approaches to record a factoring transaction under IFRS or GAAP.