Chapter Receivables Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives List the common classifications of receivables Summarize and examples After studying this Afterprovide studying this of internal control procedures that apply to receivables chapter, you should chapter, you should Describe the nature of and the accounting for be able to: be able uncollectible receivables.to: Journalize the entries for the allowance method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables Objectives Objectives Journalize the entries for the direct write-off of uncollectible receivables Describe the nature and characteristics of promissory notes Journalize the entries for notes receivable transactions Prepare the Current Assets presentation of receivables on the balance sheet Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables Classification of Receivables  Accounts Receivable—used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period  Notes Receivable—used to grant credit on the basis of a formal instrument of credit, called a promissory note  Other Receivables—include interest receivable, taxes receivable, and receivables from officers and employees Separating Separating the the Receivable Receivable Functions Functions Credit Approval Credit Info Collections Goods or services Sales Acctg Info Invoice Accounting Acctg Info Uncollectible Uncollectible Receivables Receivables Companies Companies often often sell sell their their receivables receivables to to other other companies companies This This transaction transaction isis called called factoring factoring the the receivables, receivables, and and the the buyer buyer of of the the receivables receivables isis called called aa factor factor Uncollectible Uncollectible Receivables Receivables The The Allowance Allowance Method Method  This method is consistent with the matching principle  Management makes an estimate each year of the portion of accounts receivable that may not be collectible  Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited  Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable The The Allowance Allowance Method Method On On December December 31, 31, Cynthia Cynthia Richards Richards estimates estimates that that aa total total of of $4,000 $4,000 of of the the $105,000 $105,000 balance balance in in her her company’s company’s Accounts Accounts Receivable Receivable will will eventually eventually be be uncollectible uncollectible Adjusting Entry Dec 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts 000 00 000 00 The The Allowance Allowance Method Method The The net net amount amount that that isis expected expected to to be be collected, collected, $101,000 $101,000 ($105,000 ($105,000 –– $4,000), $4,000), isis called called the the net net realizable realizable value value (NRV) (NRV) The The adjusting adjusting entry entry reduces reduces receivables receivables to to the the NRV NRV and and matches matches uncollectible uncollectible expenses expenses with with revenues revenues Notes Notes Receivable Receivable The The amount amount that that isis due due at at the the maturity maturity or or due due date date isis called called the the maturity maturity value value Notes Notes Receivable Receivable Received Received aa $6,000, $6,000, 12%, 12%, 30-day 30-day note note dated dated November November 21, 21, 2006 2006 in in settlement settlement of of the the account account of of W W A A Bunn Bunn Co Co Notes Notes Receivable Receivable Interest Calculation Principal x Rate x Time = Interest $6,000 x 12% x 30/360 = $60.00 Maturity Value Calculation Principal + Interest = Maturity Value $6,000 + $60.00 = $6,060.00 Accounting Accounting for for Notes Notes Receivable Receivable Nov 21 Notes Receivable Sales 000 00 000 00 Received 30-day, 12% note dated November 21, 2006 A A $6,000 $6,000 30-day, 30-day, 12% 12% note note dated dated November November 21 21 isis received received from from W W A A Bunn Bunn Company Company in in exchange exchange for for merchandise merchandise Accounting Accounting for for Notes Notes Receivable Receivable Dec 21 Cash 060 00 Notes Receivable 000 00 Interest Revenue Received principal and interest on matured note On On December December 21, 21, when when the the note note matures, matures, the the firm firm receives receives $6060 $6060 from from W W A A Bunn Bunn Company Company ($6,000 ($6,000 plus plus $60 $60 interest) interest) 60 00 Accounting Accounting for for Notes Notes Receivable Receivable Dec 21 Accounts Receivable—Bunn Co Notes Receivable Interest Revenue To record dishonored note and 060 00 000 00 60 00 interest IfIf W W A A Bunn Bunn Company Company fails fails to to pay pay the the note note on on the the due due date, date, itit isis considered considered aa dishonored dishonored note note receivable receivable The The note note and and interest interest are are transferred transferred to to the the customer’s customer’s account account Accounting Accounting for for Notes Notes Receivable Receivable Dec Notes Receivable Accounts Receivable—Crawford Company Received note in settlement of 000 00 000 00 account A A 90-day, 90-day, 12% 12% note note dated dated December December 1, 1, 2006, 2006, isis received received from from Crawford Crawford Company Company to to settle settle its its account, account, which which has has aa balance balance of of $4,000 $4,000 Accounting Accounting for for Notes Notes Receivable Receivable Dec 31 Interest Receivable 40 00 Interest Revenue Adjusting entry for accrued interest Assuming Assuming that that the the accounting accounting period period ends ends on on December December 31, 31, an an adjusting adjusting entry entry isis required required to to record record the the accrued accrued interest interest of of $40 $40 ($4,000 ($4,000 xx 0.12 0.12 xx 30/360) 30/360) 40 00 Accounting Accounting for for Notes Notes Receivable Receivable Mar Cash 120 00 Notes Receivable Interest Receivable Interest Revenue Received payment on note and interest 000 00 $4,000 $4,000 xx 0.12 0.12 xx 60/360 60/360 On On March March 1, 1, 2004, 2004, $4,120 $4,120 isis received received for for the the note note ($4,000) ($4,000) and and interest interest ($120) ($120) 40 00 80 00 Receivables on the Balance Sheet Crabtree Co Balance Sheet December 31, 2006 Assets Current assets: Cash Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Merchandise inventory $119,500 250,000 $445,000 15,000430,000 14,500 714,000 Highlighted items are receivables Financial Analysis and Interpretation Accounts Receivable Turnover Net sales Average accounts receivable Accounts Accounts Receivable Receivable Turnover Turnover Net sales on account Accounts receivable (net): Beginning of year End of year Total Average Accounts receivable turnover 2006 2005 $36,000,000 $32,500,000 $ 1,080,000 1,220,000 $2,300,000 $1,150,000 31.3 times $1,050,000 1,080,000 $2,130,000 $1,115,000 29.1 times Use: Use: To To assess assess the the efficiency efficiency in in collecting collecting receivables receivables $36,000,000 $32,500,000 and and in in the the management management $1,150,000 $1,115,000 of of credit credit Number Number of of Days’ Days’ Sales Sales in in Receivables Receivables Accounts receivable, end of year Average daily sales Accounts receivable, $1,220,000end of year =12.4 days Average daily sales on account ($36,000,000 ÷ 365 days) Use: Use: To To assess assess the the efficiency efficiency in in collecting collecting receivables receivables and and in in the the management management of of credit credit Chapter The The End End ... receivables chapter, you should chapter, you should Describe the nature of and the accounting for be able to: be able uncollectible receivables.to: Journalize the entries for the allowance method of accounting. .. Functions Functions Credit Approval Credit Info Collections Goods or services Sales Acctg Info Invoice Accounting Acctg Info Uncollectible Uncollectible Receivables Receivables Companies Companies often... Balances before adjustment B Year-end adjustment: $3,390 – $510 = $2,880 C Balance after adjustment Accounting for Uncollectible Accounts Receivable The Direct Write-Off Method  This method is not