Accounting For Receivables
By Mrinal Kanti das
Amounts due from individuals and other companies that are
expected to be collected in cash.
Amounts owed by Written promise for Nontrade receivables
customers on amounts to be such as interest,
account that result received. Normally loans to officers,
from the sale of requires the advances to
goods and collection of employees, and
services. interest. income taxes.
Accounts
Accounts Notes
Notes Other
Other
Receivable
Receivable Receivable
Receivable Receivables
Receivables
Recognizing Accounts Receivable
Service organization records a receivable
when it performs service on account.
Merchandiser records accounts receivable at
the point of sale of merchandise on account.
On May 1, Wilton sold merchandise on account to Bates for $50,000
terms 3/15, net 45. On May 4, Bates returns merchandise with a
sales price of $2,000. On May 16, Wilton receives payment from
Bates for the balance due. Prepare journal entries to record the May
transactions on Wilton’s books.
May 1 Accounts Receivable—Bates 50,000
Sales Revenue 50,000
4 Sales Returns and Allowances 2,000
Accounts Receivable—Bates 2,000
16 Cash ($48,000 - $1,440) 46,560
Sales Discounts ($48,000 x .03) 1,440
Accounts Receivable—Bates 48,000
Valuation of accounts receivable for
uncollectible accounts
Bad debt occur when customers do not pay for items
or services purchased on credit.
Bad debts are uncollectible accounts receivable.
Bad Debt Expense is reported as a selling or general
and administrative expense.
Accounts receivable are reported on the balance sheet
at their net realizable value .
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method
Theoretically undesirable: Losses are estimated:
No matching. Better matching.
Receivable not stated at Receivable stated at cash
cash realizable value. realizable value.
Not acceptable for financial Required by GAAP.
reporting.
Accounting for Uncollectible Receivables
(Direct Method)
Write Off:
Bad Debts Expense……………. 400
Accounts Receivable………. 400
To write off an uncollectible account. This entry is
made when the account has been determined
uncollectible. Since this determination was made after
the period in which the sale takes place, the matching
principle is violated
Accounting for Uncollectible Receivables
(Allowance Method)
Relationship to accounts
Relationship to sales receivable
(income statement approach): (balance sheet approach):
a. Percentage of sales a. Percentage of outstanding
b. Percentage of net credit accounts receivable
sales b. Aging of accounts
receivable
Allowance For Doubtful Account Method
In this method, an estimate of the total uncollectible accounts is
made at the end of the period, and an expense is recognized.
Bad Debts Expense………………….. 2,000
Allowance for Doubtful Accounts.. …………2,000
(To record estimated uncollectible accounts.)
When the account is then determined to be uncollectible, the
write-off entry is:
Allowance for Doubtful Accounts……... 400
Accounts Receivable…………………… 400
(To write off an uncollectible account.)
Recovery Of Previously Written-off Account
Receivables
Collection of an Accounts Receivable previously written off is
evidence that the write off was an error; the receivable should
therefore be reinstated as an asset.
Accounts Receivable…… 400
Allowance for Doubtful Accounts….. 400
To reinstate as an asset an accounts receivable previously
written off.
A separate entry will be made in the cash receipt journal to record
the collection.
Cash……... 400
Accounts Receivable…………………… 400
To record receipt of a previously written off account.
Aging Of Accounts Receivable Receivables
Age Group Amount % of Bad Debt Amount of Bad
Debt
Above 90 days 1,400 40 % 560
61-90 days due 400 15 % 60
31-60 days due 920 10 % 92
1-30 days due 1,600 5% 80
Not yet due 3,600 3% 108
Total estimated Bad Debt Expense: 900
Bad Debts Expense………………….. 900
Allowance for Doubtful Accounts………. 900
(To record estimated uncollectible amount )
Adjustment
Now suppose Allowance account has already credit balance of
500 taka. So the adjustment will be :
Aging schedule confirms balance of 900 taka.
The balance is already has 500 taka. So the adjustment need to
make is (900-500)=400 taka
Bad debt expense ….. 400
Allowance for doubtful account ……..400
Now suppose Allowance account has already credit balance of
1000 taka. So the adjustment will be :
Allowance for doubtful account ……..100
Bad debt expense ….. 100
Adjustment
Now suppose Allowance account has already Debit
balance of 500 taka. So the adjustment will be :
Aging schedule confirms balance of 900 taka.
The allowance a/c has debit balance of 500 taka. So
the adjustment need to make is (900+500)=1400 taka
Bad debt expense ….. 1400
Allowance for doubtful account ……..1400
Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Recognizing Notes Receivable
Illustration: Calhoun Company wrote a $1,000, two-month, 12%
promissory note dated May 1, to settle an open account. Prepare
entry would Wilma Company makes for the receipt of the note.
May 1 Notes Receivable 1,000
Accounts Receivable 1,000
Illustration: Wolder Co. lends Higley Co. $10,000 on June 1,
accepting a five-month, 9% interest note. If Wolder presents the
note to Higley Co. on November 1, the maturity date, Wolder’s
entry to record the collection is:
Nov. 1 Cash 10,375
Notes Receivable 10,000
Interest Revenue 375
($10,000 x 9% x 5/12 = $375)
Illustration: Suppose instead that Wolder Co. prepares financial
statements as of September 30. The adjusting entry by Wolder is
for four months ending Sept. 30.
Sept. 30 Interest Receivable 300
Interest Revenue 300
($10,000 x 9% x 4/12 = $300)
Illustration: Prepare the entry Wolder’s would make to record
the honoring of the Higley note on November 1.
Nov. 1 Cash 10,375
Notes Receivable 10,000
Interest Receivable 300
Interest Revenue 75
Thank You
