ch.8 Accounts Receivable

Disposing of Accounts Receivables

Companies sell receivables for 2 major reasons. 1. Receivables may be the only reasonable source of cash 2. Billing and collection are often time-consuming and costly.

Uncollectible Accounts Receivable

- Sales on account raise the possibility of accounts not being collected. - Companies record credit losses as debits to Bad Debts Expense/Uncollectible Accounts Expense.

2 Methods of Accounting for Uncollectible Accounts

1. Direct Write-Off 2. Allowance Method

3 Accounting Issues

1. Recognizing accounts receivable 2. Valuing accounts receivable 3. Disposing of accounts receivable

Recognizing Accounts Receivable

1. Service organization records a receivable when it performs service on account. 2. Merchandiser records accounts receivable at the point of sale of merchandise on account.

Types of Receivables

Amounts due from individuals and other companies that are expected to be collected in cash. - Accounts Receivable and Notes Receivable

Accounts Receivable

Amounts owed by customers on account that result from the sale of goods and services.

Allowance Method

Losses are estimated: - Better matching - Receivable stated at cash realizable value - Required by GAAP

Percentage of Receivables (Estimating the Allowance)

Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts

Percentage of Sales (Estimating the Allowance)

Management estimates what percentage of credit sales will be uncollectible. This percentage is based on past experience and anticipated credit policy.

Other Receivables

Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes.

Direct Write-Off

Theoretically undesirable: - No matching - Receivable not stated at cash realizable value - Not acceptable for financial reporting.

Valuing Accounts Receivables

With Current asset and Valuation (cash realizable value)

Notes Receivables

Written promise for amounts to be received. Normally requires the collection of interest.