Chapter 9 Accounting for Receivables Part 1 RECEIVABLES

Chapter 9 Accounting for Receivables - Part 1

RECEIVABLES • The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash. • Three major classes of receivables are: 1. Accounts Receivable 2. Notes Receivable 3. Other Receivables

ACCOUNTS RECEIVABLE The three primary accounting problems associated with accounts receivable are: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable.

VALUING ACCOUNTS RECEIVABLE • To ensure that receivables are not overstated on the balance sheet, they are stated at their net realizable value. • Net realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.

VALUING ACCOUNTS RECEIVABLE • Two methods of accounting for uncollectible accounts are: 1. Allowance method 2. Direct write-off method

DIRECT WRITE-OFF METHOD • Under the direct write-off method, no entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense. • No attempt is made to match bad debts to sales revenues or to show the net realizable value of accounts receivable on the balance sheet.

DIRECT WRITE-OFF METHOD GENERAL JOURNAL Date Jan. 12 Account Titles and Explanation Bad Debts Expense Accounts Receivable — E. Schaefer For write-off of E. Schaefer account. Debit Credit 200 Periera Company writes off E. Schaefer’s $200 balance as uncollectible on January 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.

THE ALLOWANCE METHOD • The allowance method is required when bad debts are deemed to be material in amount. • Uncollectible accounts are estimated and the expense for the uncollectible accounts is matched against sales in the same accounting period in which the sales occurred.

THE ALLOWANCE METHOD Estimated uncollectible amounts are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts (a contra asset account) at the end of each period.

ADORABLE JUNIOR GARMET Balance Sheet (partial) Current assets Cash $ 14, 800 Accounts receivable $200, 000 Less: Allowance for doubtful accounts 24, 000 Net Realizable Value 188, 000

THE ALLOWANCE METHOD GENERAL JOURNAL Date Mar. 1 Account Titles and Explanation Allowance for Doubtful Accounts Receivable — Nadeau Write-off of Nadeau account. Debit Credit 500 Actual uncollectible accounts are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

THE ALLOWANCE METHOD GENERAL JOURNAL Date July 1 Account Titles and Explanation Accounts Receivable — Nadeau Allowance for Doubtful Accounts To reverse write-off of Nadeau account. Debit 500 Credit 500 When there is recovery of an account that has been written off: 1. reverse the entry made to write off the account and. . .

THE ALLOWANCE METHOD GENERAL JOURNAL Date July 1 Account Titles and Explanation Cash Accounts Receivable —Nadeau To record collection from Nadeau. Debit Credit 500 2. Record the collection in the usual manner.