Accounts receivables and liabilities

Allowance for doubtful accounts on the balance sheet

Accounts receivable: Less: Allowance for doubtful accounts ( )

The measurements and recordings of non-current liabilities are based on

the time value of money.

The full account receivable in the allowance method of accounting for uncollectible accounts is recorded in

the accounts receivable account (as usual).

The amount lost in the allowance method of accounting for uncollectible accounts is recorded in

the allowance for doubtful accounts. *Can also be called provisions for bad debts.

Notes receivable

Claims for which formal instruments of credit are issued as proof of debt.

New examples of non-current liabilities

-Mortgage payable -Lease obligation -Bonds

Methods used for measurement of provisions

-Most likely amount -Expected value

New examples of current liabilities

-Unearned revenues -Accrued expenses -Advances received -Provisions

Examples of provisions

-Warranties. *The moment when goods are sold is when the obligation arises. -Lawsuits.

Recognizing accounts receivable

-For service organization: record receivable when it provides service on account. -For merchandiser: record receivable at point of sale of merchandise on account.

When the required provision is less than the original provision

*Take difference between original provision and required provision. -Ex. 4,600 [original] - 4,000 [required] = 600. *Debit the required provision to the provision account. *Credit the difference between original and required to the expense account [because provisions cover].

When the required provision is greater than the original provision

*Take difference between original provision and required provision. -Ex. 4,600 [original] - 5,000 [required] = 400. *Debit the required provision to the provision account. *Debit the difference between original and required to the expense account [because provisions do NOT cover].

Accounting for provisions (sp. lawsuit)

*The provision amount should be recognized in the accounting period of whichever year the damages occur- also encompassing the idea that it is likely that the company will have to pay the damages. *The amount of the provisions should be the amount in damages as this is the best estimate of what the damages will actually cost. -Credit provisions account. -Debit expense account.

Write-off posting

-Debit allowance account. -Credit accounts receivable.

Methods of account for uncollectible accounts

-Direct write-off -Allowance method

Allowance method benefits

-Losses are estimated. -Better matching of bad debts with sales. -Receivable is stated at cash realizable value.

Steps to allowance method for uncollectible accounts

1. Companies estimate the uncollectible accounts receivable. 2. Bad debts expense account is debited. 3. Allowance for doubtful accounts is credited.

Accounting issues of accounts receivables

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

Aging the accounts receivable

A method of disposing of accounts receivable in which customer balances are classified by the length of time for which they have been unpaid.

Notes payable

A written promissory note requiring the borrower to pay interest, that is issued for varied periods. *Includes -Principle of note (amount that will be paid on note at maturity date). -Maturity date of note (date that note becomes due). -Interest (payment [cost] for use of money).

Liquidity

Ability to pay maturing obligations and meet unexpected needs for cash.

Uncollectible accounts receivable

Accounts receivables not collected. *Losses are recorded in bad debts account and expense/irrecoverable debts expense (double entry).

Liabilities

Amount owing at the balance sheet date which a business is under obligation to pay. *Arise because some benefit (goods, service, or money form) has been received by business, but not yet fully paid for.

Key characteristic of liabilities

Amount owing can be determined with substantial accuracy. *Can be current (due within next accounting period) or non-current (not due within next accounting period).

Accounts receivable

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

Provisions

Amounts recognized in financial statements for future expenditures that are certain but for which there is uncertainty about the amount that will be paid and/or when it will be paid. *Follow prudence principle (recognizing all possible losses but not anticipating possible gains).

Valuing/measuring accounts receivable

As accounts receivable are current assets, they are valued at their net realizable value.

Bonds

Contract between borrowing company (issuer) and lender (investor) in which the borrower promises to pay a specific amount of interest at the end of each period the bond is outstanding and to repay the principal at the maturity date of the bond contract. *Usually have maturity dates exceeding ten years.

Recovery of uncollectible account and provisions between GAAP and IFRS

GAAP method leaves provision left over whereas IFRS does not have a provision left over.

Percentage of sales

Management estimates what percentage of credit sales will be uncollectible (based on past experience and anticipated credit policy). *Matching between sales and bad debts expense. *Emphasis on income statement relationships. *Adjusting entry to record bad debts disregards existing balance in allowance for doubtful accounts.

Percentage of receivables

Management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. *Cash realizable value between counts receivable and allowance for doubtful accounts. *Emphasis on balance sheet relationships.

Current ratio (C.R.)

Measurement of adequacy of current assets to meet company's short-term liabilities. *Permits comparison of liquidity of different-sized companies and/or single company at different times.

Journal posting of current liabilities

Note must be added with details of note (interest rate, principle, maturity date, etc).

n/30

Period in which a buyer is obliged to pay an accounts receivable. (no discount/30 days).

Current maturities of long-term debt

Portion of long-term debt that becomes due in current year. *Does not require an adjusting entry.

Difference between provisions and liabilities

Provisions do not have certain timing and amount like liabilities have.

2/10

Special accounts receivable payment plan in which the buyer pays an account receivable in 10 days and receives a 2% discount on the total sale. (2% discount/10 days).

Estimating the allowance can be done as

a percentage of sales or percentage of receivables.

Receivables are

amounts due from individuals and other companies that are expected to be collected in cash. *Divided into accounts receivable and notes receivable.

Credit card sales are recorded the same as

cash sales.

Allowances for doubtful accounts are considered as

contra-assets. *Therefore, parentheses under accounts receivable in balance sheet.

Working capital

current assets - current liabilities

At the time the specific account is written off as uncollectible, companies

debit the allowance for doubtful accounts and credit accounts receivable. *Basically transfer.

Calculating interest

i= (principle of note) * (annual rate of interest) * (time of note [expressed in years])

Current liabilities are expected to be paid from

existing current assets or through the creation of other current liabilities. *Company will pay debt within one year of the operating cycle (whichever is longer).

Direct write-off is theoretically undesirable because

it does not fulfill the matching principle and the receivable is not stated at its cash realizable value.

Other receivables would be considered as

non-trade. *Interest loans to offices, advances to employees, and income taxes refundable.