Chapter 8: Receivables

why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method?

the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

Recognizing account receivables

A service organization records a receivable when it performs service on account. A merchandiser records accounts receivable at the point of sale of merchandise on account. Discounts encourage early payment Sales returns reduce receivables Some retailers who issue their own credit cards charge interest if the balance due is not paid on time

Valuing accounts receivables

Determining the amount to report is sometimes difficult because some receivables will become uncollectible The seller records these losses that result from extending credit as Bad Debt Expense. Two methods for uncollectible accounts...

Direct write off method

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense and credited to Accounts Receivable. The direct write-off method makes no attempt to match bad debts expense to revenues or to show the cash realizable value of the receivables in the balance sheet.

Account Receivables

are amounts customers owe on account. They result from the sale of goods and services. Companies generally expect to collect accounts receivable within 30 to 60 days.

Other Receivables

include interest receivable, loans to company officers, advances to employees, and income taxes refundable. These do not generally result from the operations of the business.

Allowances method

involves estimating uncollectible accounts at the end of each period - helps matching and states receivables at cash net realizable value (a/r - afda) Three features: (1) Uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues are recorded. (2) Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off as uncollectible. Read the rest from notebook...

Three Issues associated with account receivables

recognizing account receivables, valuing accounts receivables, accelerating cash receipts from receivables

Receivables

refers to amounts due from individuals and companies. Receivables are claims that are expected to be collected in cash.

Notes Receivables

represent written promises that are evidenced by formal instruments for amounts to be received. The note normally requires the collection of interest and extends for time periods of 60-90 days or longer