Unit 9
Unit 9
Unit 9
Receivables
INTRODUCTION TO RECEIVABLES
Receivables are any monetary claims against debtors. Credit can be granted in two forms:
open account or evidenced by a formal instrument. When a formal instrument of credit, that
is a promissory note, the creditor has a stronger legal claim and can endorse it to a third party.
The party that promises payment is known as the maker, and the party entitled to receive the
payment is the payee. Notes receivable can be interest or non-interest bearing. The amount
due at maturity, known as maturity value, is equal to the face value plus any accrued interest.
Receivables not expected to be collected within the current year, should be listed as
investments on the balance sheet.
RECEIVABLE CONTROLS
Receivables require the same internal controls as other assets of a business. Employees
responsible for collecting and approving receivables should not be involved with accounting
aspect related to them. All accounting functions should be designed so that the work of one
employee can be used as verification of another employee's work. A business that has a
substantial amount of notes may find the use of a notes receivable register very helpful. It
provides detailed information on each note, and assists in the timely collection of notes.
Proper controls of receivables also includes obtaining approval for credit sales, sales returns
and allowances, and sales discounts.
CALCULATING INTEREST
Interest rates are usually stated on an annual basis. The interest is computed by multiplying
principal by rate and then by time (principal x rate x time). The maturity value is determined
by calculating interest and adding it to the face value of the note. When interest is computed
for periods of less than a year, time is expressed as a fraction. The numerator of the fraction is
the length of the note and the denominator is the number of days in a year. Government
agencies use 365 days in the denominator, while the private sector uses 360 days.
Example:
Price per unit will be $8.50 for sales of more than 200 units.
b. Terms of payment
Example:
Example 1:
Example:
Debit Credit
Bad debts expense $25,000
Allowance for bad debts $25,000
Debit Credit
Allowance for bad debts $5,000
Accounts receivable $5,000
Example:
Journal entry
Debit Credit
Bad debts expense $25,000
Allowance for bad debts $25,000
Example:
Debit Credit
Bad debts expense $6,000
Allowance for bad debts $6,000
Debit Credit
Uncollectible Accounts Expense XX
Accounts Receivable XX
Debit Credit
Accounts Receivable XX
Uncollectible Accounts Expense XX