Chapter 8 Principles of Financial Accounting PDF

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 8, pg336 Accounting for Receivables Prepared by: De...

WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 8, pg336 Accounting for Receivables Prepared by: Debbie Musil Kwantlen Polytechnic University 1  Trying to collect from incommunicado clients Case Study p336 Copyright John Wiley & Sons Canada, Ltd. 2  Learning Goals Let’s turn the following into students friendly learning goals……….. record transactions related to accounts receivable, including doubtful accounts, write-offs, and recoveries; explain the accounting procedures for notes receivable. Copyright John Wiley & Sons Canada, Ltd. 3  Accounting for Receivables Accounts receivable – Recognition and valuation Notes receivable – Recognition and disposition Statement presentation and management of receivables – Presentation – Analysis – Accelerating cash receipts from receivables Copyright John Wiley & Sons Canada, Ltd. 4 Copyright John Wiley & Sons Canada, Ltd. 5 Copyright John Wiley & Sons Canada, Ltd. 6  Chapter 8: Success Criteria I will be successful when I can…….. 1. Calculate the net realizable value of accounts receivable and account for bad debts. 2. Account for notes receivable. Copyright John Wiley & Sons Canada, Ltd. 7  Valuing Accounts Receivable Some receivables will become uncollectible – Not reported as assets if no future benefit – Net realizable value: the collectible amount Receivables are written down to their collectible amount – By recording bad debt expense – In the same period as related revenues are recorded Key issue is to estimate the amount that will not be collected Copyright John Wiley & Sons Canada, Ltd. 8  The Allowance Method Three features of allowance method: 1. Amount of uncollectible receivables is estimated and recorded at end of period 2. Actual uncollectibles are written off against the allowance when it is determined the specific account is uncollectible 3. If an account previously written off is recovered the write off is reversed and the collection recorded Copyright John Wiley & Sons Canada, Ltd. 9  Allowance for Doubtful Accounts Deducted from Accounts Receivable in the current assets section of balance sheet Net realizable value = Accounts Receivable less Allowance for Doubtful Accounts Copyright John Wiley & Sons Canada, Ltd. 10  Estimating the Allowance: Percentage Receivables Approach Calculates the percentage of receivables that are estimated to be uncollectible – Based on past experience and credit policy Can be applied to total receivables balance or amounts grouped by age – Requires an aging schedule to be prepared Better estimate of net realizable value Also called the balance sheet method Copyright John Wiley & Sons Canada, Ltd. 11  Teaching the Class pg362+ Column 1: () 1. Read Pages 344 (after Illustration 8-3) to 346 (stop at Writing Off Uncollectible Accounts) 2. What does it mean for the Allowance Account to have an unadjusted credit balance? 3. Complete BE8-6 a) and BE8-7 a) and c) (Whiteboard) Column 2: () 1. Read Pages 344 (after Illustration 8-3) to 346 (stop at Writing Off Uncollectible Accounts) 2. What does it mean for the Allowance Account to have an unadjusted debit balance? 3. Complete BE8-6 b) and BE8-7 a) and b) (Whiteboard) Column 3: () 1. Read Pages 346 (start at Writing Off Uncollectible Accounts) to 348 (stop at Summary…) 2. How do write-offs and subsequent recoveries affect net income and the net realizable value of the AR when they are recorded? 3. Complete BE8-9, 10 (Whiteboard) Copyright John Wiley & Sons Canada, Ltd. 12 BE6-6,7, 9, 10 Copyright John Wiley & Sons Canada, Ltd. 13 BAT4M E8-4 Copyright John Wiley & Sons Canada, Ltd. 14  1. Recording Estimated Uncollectibles Estimated amount of uncollectible accounts is: – Debited to an expense account – bad debts expense – Credited to a contra asset account – allowance for doubtful accounts Copyright John Wiley & Sons Canada, Ltd. 15  2. Recording Write-Off of Uncollectible Accounts Amount written-off is debited to the allowance account Bad debt expense is not increased – Expense previously recognized when allowance initially recorded Copyright John Wiley & Sons Canada, Ltd. 16 3. Recovery of an Uncollectible Account If cash is collected from a customer after the account has been written off: 1. Reverse write-off entry to restore customer’s account 2. Record collection of the account receivable in the usual way Copyright John Wiley & Sons Canada, Ltd. 17 Copyright John Wiley & Sons Canada, Ltd. 18 BAT4M E8-7 Copyright John Wiley & Sons Canada, Ltd. 19  Chapter 8: Success Criteria I will be successful when I can………. 1. Calculate the net realizable value of accounts receivable and account for bad debts. 2. Account for notes receivable. Copyright John Wiley & Sons Canada, Ltd. 20  Notes Receivable Credit may be granted in exchange for a promissory note: – A written promise to pay a specified amount of money on demand or at a definite time – Can result from financing a purchase, lending money, or extending the account receivable beyond its normal amounts of due dates – Bears interest The party making the promise is the maker The party to whom payment is made is called the payee Copyright John Wiley & Sons Canada, Ltd. 21  Recording Interest Formula for calculating interest: An annual rate of interest Separate interest receivable account is used (value of note is not altered) Copyright John Wiley & Sons Canada, Ltd. 22  Recognizing Notes Receivable If note is received to settle an outstanding account receivable: If received for cash, credit is to Cash Notes are valued at net realizable value – Similar process to determine bad debt expense and allowance as for accounts receivable Copyright John Wiley & Sons Canada, Ltd. 23  Disposing of Notes Receivable A note is honoured when paid in full on its maturity date – Amount due is principal + interest Copyright John Wiley & Sons Canada, Ltd. 24  Disposing of Notes Receivable 2 A note is dishonoured if not paid in full at maturity – Note is no longer negotiable – Payee still has a valid claim against maker – Balance is transferred to Accounts Receivable in hopes of collection Copyright John Wiley & Sons Canada, Ltd. 25 BAT4M E8-9 Copyright John Wiley & Sons Canada, Ltd. 26 BAT4M P8-3 Copyright John Wiley & Sons Canada, Ltd. 27  Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. 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