Accounting Ch 8 - Reporting and Analyzing Receivables PDF

Intro to Financial Accounting Chapter 8 - Reporting and Analyzing Receivables Types of Receivables ​ Amounts owed to a company by its customers, employees, government and others, considered financial assets ​ Claims that are expected to be collected in cash ​ Frequ...

Intro to Financial Accounting Chapter 8 - Reporting and Analyzing Receivables Types of Receivables ​ Amounts owed to a company by its customers, employees, government and others, considered financial assets ​ Claims that are expected to be collected in cash ​ Frequently classified as: -​ Accounts receivable - amounts owed by customers resulting from the sale of goods and services -​ Notes receivable - written promises to repay debt ​ A/R and N/R resulting from sales transactions are often referred to as trade receivables -​ Other receivables (nontrade receivables) - do not result from the normal operations of the business ​ interest receivable, loans to company officers and advances to employees, sales tax recoverable, income tax receivable Accounts Receivable ​ A receivable is recorded when service is provided on account or at point of sale of merchandise on account. ​ Initially recorded at the transaction price. ​ A receivable is reduced by variable consideration such as expected sales returns and allowances and by sales discounts. ​ Also reduced when payment is received, or the merchandise is returned by the customer. Accounts Receivable Subsidiary Ledger ​ A subsidiary ledger (or subledger) is a group of accounts that share a common characteristic (i.e. they are all receivable accounts). ​ The subsidiary ledger for accounts receivable provides the details that support the total balance for accounts receivable in the general ledger. ​ The single accounts receivable account in the general ledger is the control account. -​ The balance in the control account must always equal the total of all the individual subsidiary ledger accounts (one for each customer) in the subsidiary ledger Interest Revenue ​ If a customer does not pay in full within the credit term period (usually 30 days), an interest (financing) charge may be added to the balance due -​ Seller recognizes interest revenue and increases the account receivable balance owed by the customer Account for Bad Debts ​ Some accounts receivable become uncollectible. ​ Expected credit losses are debited to an account called Credit Losses. -​ Based on company’s historical credit loss experience -​ Also called bad debt expense or impairment losses ​ Credit loss expense is recognized in the same period that the related sales revenue is reported. Allowance Method ​ This method estimates the uncollectible accounts at the end of each period. ​ The amount estimated is shown in the Allowance for Doubtful Accounts -​ A contra asset account that is shown below Accounts Receivable and netted with Accounts Receivable to determine carrying amount. ​ Note that the allowance is an estimate - it does not show specific customer accounts. Estimating the Allowance ​ Most companies use the percentage of receivables basis to determine the allowance -​ Estimate what percentage of receivables are likely to be uncollectible. -​ Apply this percentage to total receivables, or -​ Apply this percentage to receivables classified according to the length of time they have been outstanding (called aging of accounts receivable method). ​ Once the appropriate estimate for uncollectible accounts is determined, an adjusting entry can be recorded. ​ The amount of the adjusting entry is the difference between the required balance and the existing balance in the allowance account. Measuring and Recording Estimated Uncollectible Accounts The balance in the Allowance for Doubtful Accounts is deducted from Accounts Receivable in the current assets section of the statement of financial position: Recording the Write-Off of an Uncollectible Account ​ The vice president of finance authorizes a write-off of $2,500 owed by T. Ebbet: Recording the Recovery of an Uncollectible Account Record in two separate entries: Summary of the Allowance Method 1.​ Recording estimated uncollectible accounts -​ Any increase to the allowance is recorded as bad debts expense 2.​ Recording the write-off of an uncollectible account -​ Actual accounts are written off when they are determined to be uncollectible -​ This write-off reduces the allowance 3.​ Recording the recovery of an uncollectible account -​ If a written-off account is later collected, the write-off is reversed and the collection recorded Account for Notes Receivable ​ Stronger legal claim to assets than accounts receivable; written promise (promissory note) to repay ​ A credit instrument that normally -​ Requires the payment of interest -​ Extends for time periods greater than 30 days ​ Often accepted from -​ When individuals and companies lend or borrow money -​ When the amount and the length of credit period exceeds normal limits -​ To settle an accounts receivable when payment cannot be made within the established credit period Formula for Calculating Interest ​ The basic formula for calculating interest on an interest-bearing note is Principal Amount x Annual Interest Rate x Time in Terms of One Year = Interest The interest rate specified on the note is an annual rate of interest. The time factor expresses the number of months in the year that the note is outstanding (number of months divided by 12) Derecognizing Notes Receivable ​ Honored (Collected) -​ Paid in full at maturity date -​ Collection recorded ​ Dishonoured -​ Not paid at maturity date; note no longer negotiable -​ Balance transferred to Accounts Receivable if evenual collection expected -​ Balance written off to Bad Debts Expense if eventual collection not expected Statement Presentation  ​ Statement of Financial Position -​ Receivables reported in the current assets section -​ Following cash and held for trading investments -​ Reported at carrying amount, but helpful to disclose gross receivables and the allowance for doubtful accounts ​ Income Statement -​ Bad debts expense is reported as an operating expense -​ Interest revenue is non-operating Managing Accounts Receivables ​ Determine to whom to extend credit ​ Establish a payment period ​ Monitor collections -​ Prepare and update an accounts receivable ageing schedule ​ Evaluate the liquidity of receivables Evaluating the Liquidity of Receivables ​ Liquidity is measured by how quickly certain assets can be converted into cash -​ Receivables turnover -​ Average collection period Receivables Turnover ​ Is a measure of the liquidity of receivables Receivables Turnover = Net credit sales Average Gross Accounts Receivables *Higher is better* Average Collection Period ​ Is the average amount of time that a receivable is outstanding Average collection period = 365 days Receivables Turnover *Lower is better* Comparing IFRS and ASPE *NO significant differences*