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Chapter 7 Reporting & Analyzing Receivables

by: Katie Mulliken

Chapter 7 Reporting & Analyzing Receivables ACCT2101

Marketplace > University of Georgia > Accounting > ACCT2101 > Chapter 7 Reporting Analyzing Receivables
Katie Mulliken
GPA 3.91

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Chapter 7 Reporting & Analyzing Receivables, credit sales, debit sales, direct credit sales, (direct write-off method), allowance method, estimating bad debt, notes receivable, interest, dishonorin...
Intro to Accounting 1
Class Notes
Accounting, accounting chapter 7, reporting & analyzing receivables, credit sales, debit sales, direct credit sales, direct write off method, allowance method, estimating bad debt, notes receivable, Interest, dishonoring notes
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This 5 page Class Notes was uploaded by Katie Mulliken on Tuesday April 5, 2016. The Class Notes belongs to ACCT2101 at University of Georgia taught by Bhandarkar in Spring 2016. Since its upload, it has received 13 views. For similar materials see Intro to Accounting 1 in Accounting at University of Georgia.

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Date Created: 04/05/16
Chapter 7 – Reporting & Analyzing Receivables Receivables – Amounts Due from another party. The most common receivables are:  Accounts Receivable o Amounts due from customers for Credit Sales o Credit Sales  credit card sales Or direct credit sales to cust(in a time period)  Notes Receivable Credit Sales When a customer extends credit to customers: 1) Maintains a separate account receivable for each customer 2) Accounts for bad debts from credit sales 1. With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer’s checks 2. The bank increases the balance in the company’s checking account 3. The company usually pays a fee of 1% to 5% for the service Accounting for Credit Card Sales depends upon when Cash will be received form the sale… 1) Immediate on deposit of Credit Card Receipt  Cash Sale 2) Delayed until Credit Card Company makes payment  Sale on Account (A/R until paid) Credit Card Sales Immediate Payment ~ Company sells $1,000 bank credit card sale to a customer. Bank has a 2% processing fee. Company’s account is credited immediately on deposit of cc receipts  Cash 980  Credit Card Expense 20 o Sales 1000 Wait for Payment ~ Company has a bank cc sale of $1,000 to a customer. Bank has a 2% processing fee. Patient has to wait before payment is received from the cc company  A/R Credit Card Company 980  Credit Card Expense 20 o Sales 1000 Once you receive an expected payment… Cash 980 A/R Credit Card Company 980 Direct Credit Sales to Customers Accounting for Uncollectable Accounts that result from Credit Sales Some customers may not pay their account and will go uncollected, also called Bad Debts When an account receivable becomes uncollectable, a firm incurs a bad debt loss. Bad Debt  Accounts of customers who do not pay what they have promised to pay. An expense of selling on credit; Bad Debt is also called Uncollectable Accounts  The total amount of uncollectable accounts is an expense of selling on credit Accounting for Uncollectable Accounts/ Bad Debts 2 Methods: 1) Direct Write Of 2) Allowance Methods ** most used in our class Direct Write-Off Method Method that records the loss from an uncollectable account receivable at the time that it is determined to be uncollectable with no attempt to estimate bad debts  When you realize a customer is never going to pay you, you write of that account  Expense is recorded each time an account is written of  Neither total assets nor net income is afected by the write of of a specific account o Instead, both assets & net income are afected in the period when bad debts expense is predicted & recorded with an adjusting entry ~ We determine that we cannot collect $2,000 from Mr. Broke, a credit customer~ Bad Debt Expense 2,000 Accounts Receivable- Broke 2,000 ^^ decrease asset, decrease equity ~ Mr. Broke decides to pay $500 ~ First reinstate account (to the extent of payment received) Accounts Receivable- Broke $500 Bad Debt Expense $500 Second, record receipt of payment Cash $500 A/R – Broke $500 Companies must weigh at least 2 accounting concepts when considering the use of the direct write of method: 1) Matching Principal – Matching requires expenses to be reported in the same accounting period as the sales they help produces. 2) Materiality Principle – states an amount can be ignored if its efect on the financial statements is unimportant to uses’ business decisions Direct Write Of does not adhere to the Matching Principle though it’s acceptable because.. Materiality Principle makes it ok to do this, even though it goes against Matching Principle Allowance Method  At the end of each period, a company estimates total bad debts expected to be realized from that period’s sales, based on industry averages or its past experiences  “potential uncollected accounts”  Estimated bad debts expense is recorded in the period when the related sales are recorded (Matching). This is done by using an Allowance for Doubtful Accounts (ADA) – this is a contra-asset account that is ofset against A/R on the balance sheet  Accounts Receivable are reported on the balance sheet at the estimated amount of cash to be collected (Net Realizable Value)  Net Realizable Value— expected proceeds from converting an asset  cash o Advantages:  Records estimated bad debt expense in the period w related sales recorded  Reports A/R on balance sheet at estimated amount of cash to be collected Allowance for Doubtful Accounts (ADA)—balance approximates uncollectable A/R Example: ~At end of 1 year operations, Company estimates $5000 of it’s A/R will be uncollectable. The total accounts receivable balance on Dec 31 is $265,000 Bad Debt Expense 5000 ADA 5000 (^ decreases assets, decrease equity) Writing of a Bad Debt under the Allowance Method  NO impact on accounting equation!  Allowance method estimates bad debts expense at the end of each accounting period and records it with an adjusting entry… when a debt’s deemed uncollectable.. o Allowance for Doubtful Accounts $1000  Accounts Receivable- Broke $1000 2 methods for Estimating Bad Debt Expense: 1) Percent of Sales  Current period sales x bad debt % = estimated bad debt expense 2) Percent of Accounts Receivable / Aging of Accounts Receivable  Assumes a given % of a company’s A/R is uncollectable. This % is based on past experiences, and is impacted by current conditions $$ amount of all receivables x % = estimated $$ amount of uncollectable  Aging of Accounts Receivable – method of classifying accounts receivable by how long they are past due for purposes of estimating uncollectable accounts 1) All Year-end A/R is broken down into age classifications (Group together into categories based on how far past they are due) 2) Each age grouping has a diferent likelihood of being uncollectable 3) Compute a separate allowance for each age grouping Summary of Allowance Methods % Sales—with income focus does a better job at matching bad debts expenses with sales A/R method—with balance sheet focus is better at reporting accounts receivable at realizable value Notes Receivable  Notes Receivable are promissory notes written with a promise to pay a specific amount at a specific future date  Notes are made up in 30-day increments  Most notes carry interest (in this chapter, we are the receivers of the note/check)  Principle of a Note – is the amount that the signer of a note agrees to pay back when it matures, not including interest  Maker of a Note – entity who signs a note & promises to pay it at maturity (it’s a liability to them)  Payee of a Note – entity to whom a note is made payable (it’s an asset to them) Interest – a charge using money loaned from one entity to another until its due date  Interest is an expense for buyer  Interest is a revenue for lender Maturity Date of a Note – date when a note’s principle & interest are due (the day the note must be repaid)  The Period of a note is the time from the note’s contract date to its maturity date (due on the same day of the month at its original date) Interest = Principle of Note x Annual Interest Rate x Time (expressed in fraction of year) Accounting for Notes Receivable:  Notes can be received: why a company would receive a notes receivable 1) As payment for products or service 2) In exchange for an existing Accounts Receivable 3) In exchange of money loaned When a note’s maker is unable or refuses to pay at maturity it’s Dishonored  When a note is dishonored, you remove the amount of this note from the Notes Receivable account and charge it back to an Accounts Receivable from its maker.


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