Chapter 9
ACCOUNTING FOR
RECEIVABLES
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1
ACCOUNTS RECEIVABLE
A receivable is an amount due from another party.
This graph shows recent
dollar amounts of
receivables and their percent
of total assets for four well-
known companies.
A company must also maintain a separate account for
each customer that tracks how much that customer
purchases, has already paid, and still owes.
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C1
SALES ON CREDIT
On July 1, TechCom had a credit sale of $950 to
CompStore and a collection of $720 from RDA
Electronics from a prior credit sale.
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C1
SALES ON CREDIT
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P1
VALUING ACCOUNTS RECEIVABLE
Some customers may not pay their account.
Uncollectible amounts are referred to as bad debts.
There are two methods of
accounting for bad debts:
Direct Write-Off
Method (Omitted)
Allowance Method
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P1
ALLOWANCE METHOD
At the end of each
period, estimate total bad
debts expected to be
realized from that
period’s sales.
Two advantages to the allowance method:
1. It records estimated bad debts expense in the period
when the related sales are recorded.
2. It reports accounts receivable on the balance sheet
at the estimated amount of cash to be collected.
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P1
RECORDING BAD DEBTS EXPENSE
TechCom had credit sales of $300,000 during its first year
of operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
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P1
BALANCE SHEET PRESENTATION
TechCom had credit sales of $300,000 during its first year
of operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
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P1
WRITING OFF A BAD DEBT
TechCom decides that J. Kent’s $520 account is
uncollectible.
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P1
WRITING OFF A BAD DEBT
The write-off does not affect the realizable
value of accounts receivable.
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P1
RECOVERING A BAD DEBT
To help restore credit standing, a customer sometimes
volunteers to pay all or part of the amount owed on an
account even after it has been written off.
On March 11, Kent pays in full his $520 account
previously written off.
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P2
ESTIMATING BAD DEBTS EXPENSE
Two Methods
1. Percent of Sales Method
2. Accounts Receivable Methods
Percent of Accounts Receivable
Aging of Accounts Receivable
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P2
PERCENT OF SALES METHOD
Bad debts expense is computed as follows:
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P2
PERCENT OF SALES METHOD
Musicland has credit sales of $400,000 in 2011. It is
estimated that 0.6% of credit sales will eventually
prove uncollectible.
Let’s look at recording Bad Debts Expense for 2011.
Musicland’s accountant
computes estimated
Bad Debts Expense of
$2,400.
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P2
PERCENT OF SALES METHOD
EXAMPLE
At year-end (December 31), ABC Company estimates its bad
debts as 1% of its annual credit sales of $1,000,000. ABC
records its Bad Debts Expense for that estimate.
Bad debt expense……………..………...….. 10,000
Allowance for doubtful accounts …….10,000
On the following March 1, ABC decides that the $500 account
of Mr. Kevin is uncollectible and writes it off as a bad debt.
Allowance for doubtful accounts …..500
Accounts Receivable – Kevin ……….500
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P2
PERCENT OF SALES METHOD
EXAMPLE
On July 5, Kevin unexpectedly pays the amount previously
written off.
Accounts Receivable – Kevin ………500
Allowance for doubtful accounts …..500
Cash …………………………………………………500
Accounts Receivable – Kevin ……..……500
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P2
PERCENT OF SALES METHOD
EX 9-4
At year-end (December 31), Alvare Company estimates its bad
debts as 0.5% of its annual credit sales of $875,000. Alvare
records its Bad Debts Expense for that estimate.
On the following February 1, Alvare decides that the $420
account of P. Coble is uncollectible and writes it off as a bad
debt.
On June 5, Coble unexpectedly pays the amount previously
written off.
Prepare the journal entries of Alvare to record these
transactions and events of December 31, February 1, and
June 5.
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P2 PERCENT OF RECEIVABLES
METHOD
1. Compute the estimate of the Allowance
for Doubtful Accounts.
2. Bad Debts Expense is computed as:
Total Estimated Bad Debts Expense
– Previous Balance in Allowance Account
= Current Bad Debts Expense
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P2 PERCENT OF RECEIVABLES
METHOD
Musicland has $50,000 in accounts receivable and a $200 credit
balance in Allowance for Doubtful Accounts on December 31, 2011.
Past experience suggests that 5% of receivables are uncollectible.
Desired balance in Allowance for
Doubtful Accounts.
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P2
PERCENT OF RECEIVABLES METHOD
EXAMPLE
At each calendar year-end, ABC Co. uses the percent of accounts receivable method
to estimate bad debts.
On December 31, 2012, it has outstanding accounts receivable of $100,000, and it
estimates that 4% will be uncollectible.
Prepare the adjusting entry to record bad debts expense for year 2011 under the
assumption that the Allowance for Doubtful Accounts has a $1,000 credit balance
before the adjustment.
Desired balance in Allowance for
Doubtful Accounts. Allowance for doubtful accounts
1,000 Beginning balance
3,000 Adjustment
4,000 Balance
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PERCENT OF RECEIVABLES METHOD
EXAMPLE
Bad debts expense …………….. 3,000
Allowance for doubtful accounts …3,000
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P2
PERCENT OF RECEIVABLES METHOD
EX 9-5
At each calendar year-end, Cabool Supply Co. uses the percent of
accounts receivable method to estimate bad debts.
On December 31, 2011, it has outstanding accounts receivable of
$53,000, and it estimates that 4% will be uncollectible.
Prepare the adjusting entry to record bad debts expense for year
2011 under the assumption that the Allowance for Doubtful
Accounts has
a)a $915 credit balance before the adjustment, and;
b)a $1,332 debit balance before the adjustment.
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P2
AGING OF RECEIVABLES METHOD
Classify each receivable by how
long it is past due.
Each age group is multiplied by its
estimated bad debts percentage.
Estimated bad debts for each group
are totaled.
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P2
AGING OF ACCOUNTS RECEIVABLE
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P2
AGING OF ACCOUNTS RECEIVABLE
Musicland has an unadjusted
credit balance in the allowance
account is $200.
We estimated the proper
balance to be $2,270.
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READINGS AND EXERCISES
Readings
Chapter Nine (pages 227-236)
Exercises for the tutorial
Ex.9-6 & Problem 9-2A and 9-3A part 1&2
Chapter Exercises:
Priority 1 Qs 9-3, 9-5, 9-7, 9-8, 9-9
Ex 9-6, 9-7, 9-8, 9-11
Priority 2
Pr 9-2A, 9-3A
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END OF CHAPTER 9
