Accounting for Receivables PDF

Lect. 10&11 Accounting for Receivables  Accounting for Receivables The term receivables refer to amounts due from individuals and companies. Three major classes of receivables are: 1 Accounts Receivable - Amounts owed by customers on account. 2 Notes Receivable - Cl...

Lect. 10&11 Accounting for Receivables  Accounting for Receivables The term receivables refer to amounts due from individuals and companies. Three major classes of receivables are: 1 Accounts Receivable - Amounts owed by customers on account. 2 Notes Receivable - Claims for which formal instruments of credit are issued. 3 Other Receivables – - Non-trade receivables Examples: interest receivable and advances to employees.  1. Recognizing Accounts Receivable Example: On July 1, 2012, Jordache Co. sells merchandise on account to Polo Company for $1,000, terms 2/10, n/30. On July 5, Polo returns merchandise worth $100 to Jordache Co. On July 9, Jordache receives payment from Polo Company for the balance due. Required: The General Journal entries to record these transactions on the books of Jordache Co.  1. Recognizing Accounts Receivable Solution: The General Journal entries Date Description Dr Cr July 1 Accounts Receivables 1,000 sales 1,000 July 5 Sales Returns and Allowances 100 Accounts Receivable – Polo Company 100 July 9 Cash ($900-$18) 882 Sales Discounts ($900 *2%) 18 Accounts Receivable—Polo Company 900  2.Valuing Accounts Receivable Two methods are used in accounting for uncollectible accounts: (1) The direct write-off method and (2) The allowance method. (GAAP)  2.Valuing Accounts Receivable 1. Direct write-off method for uncollectible accounts Example 1: Assume that Warden Co. writes off as uncollectible M. E. Doran’s $200 balance on December 12. Required: Prepare the General Journal entries to record Bad Debts according to the Direct write-off method. Solution: Date Description Dr Cr Dec 12 Bad Debts Expense 200 Accounts Receivable—M. E. Doran 200 (To record write-off of M. E. Doran account) Dec 31 Income summary 200 Bad debts expense 200 (To close bad debts expense)  2.Valuing Accounts Receivable 1. Direct write-off method for uncollectible accounts Example 2: on Dec 31, the Accounts Receivable were 1,865,000, on the same date, the company decided to consider 15,000 as bad debts. Required: Prepare the General Journal entries to record Bad Debts according to the Direct write-off method. Solution: Date Description Debit Credit Dec 31 Bad Debts Expense 15,000 Accounts Receivable 15,000 (To record write-off of the company) Dec 31 Income summary 15,000 Bad debts expense 15,000 (To close bad debts expense)  2.Valuing Accounts Receivable 2. The allowance method Example: Hampson Furniture has credit sales of $1,200,000 on March, 2012. Of this amount, $200,000 remains uncollected. On April 20,2012, the credit manager estimates that $12,000 of these sales will be uncollectible. On Sep 2, 2012, the company decided to write-off of the $500 balance owed by R. A. Ware. Required: Prepare the General Journal entries to record the estimated uncollectible. Date Description Debit Credit April Bad Debts Expense 12,000 20 Allowance for Doubtful Accounts 12,000 (To record estimate of uncollectible accounts) Sep 2 Allowance for Doubtful Accounts 500 Accounts receivable 500 (To write off the account)  Recovery of an Uncollectible Account: Example: Assume that on July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. Required: Prepare the General Journal entries to record in the Company book’s. Solution: The General Journal : Date Description Debit Credit 1 July 1 Accounts Receivable —R. A. Ware 500 Allowance for Doubtful Accounts 500 (To reverse write-off of R. A. Ware account) July 1 Cash 500 2 Accounts Receivable —R. A. Ware 500 (To record collection from R. A. Ware)  Estimating the Allowance Two bases are used to determine this amount: (1) percentage of sales (2) percentage of receivables. Both bases are allowed (GAAP). The choice is a management decision.  Estimating the Allowance 1. Percentage of sales basis: Example: you have the following information: 1/1/ 2022,The net credit sales for 2012 are $800,000, and estimates that will incur 1% of this amount as bad debts. The Company elects to use the percentage-of-sales basis. 7/ 25 ,The company anticipates that the customer will not be able to pay $1,000. Required: Prepare the General Journal entries to record in the Company book’s. Date Description Debit Credit 1/1 Accounts receivable 800,000 Sales 800,000 1/1 Bad Debts Expense 8,000 Allowance for Doubtful Accounts 8,000 7/25 Allowance for Doubtful Accounts 1,000 Accounts receivable 1,000  Estimating the Allowance 2. Percentage-of-Receivables : Example: Feb. 13, Rankin Company estimates that 6% of the receivables will be uncollectible. The balance of accounts receivable is $100,000. Dec 31, the company anticipates that the customer will not be able to pay $1,500. Required: Prepare the General Journal entries to record in the Company book’s. Date Description Debit Credit Feb. 13 Bad Debts Expense 6,000 Allowance for Doubtful Accounts 6,000 (To adjust allowance account to total estimated uncollectible) Dec. 31 Allowance for Doubtful Accounts 1,500 Accounts receivable 1,500